What is a primary characteristic of a well-diversified portfolio according to risk management principles?

A primary characteristic of a well-diversified portfolio is that it achieves a balanced contribution of risk across various assets. This principle of diversification is foundational in risk management as it aims to reduce the overall portfolio risk by spreading investments across different asset classes, industries, geographic regions, and investment styles.

By ensuring that no single asset has an outsized influence on the portfolio's risk and return profile, a diversified portfolio can mitigate the impact of individual asset volatility and unfavorable market conditions on the overall performance. This approach helps in stabilizing returns over time, as the adverse performance of some assets may be offset by the favorable performance of others, leading to a more resilient investment strategy.

Effective diversification does not mean merely holding a large number of assets; it involves strategically selecting a mix of assets that behave independently of one another. This balance is crucial for achieving long-term investment objectives while managing potential risks.