Which of the following best describes a balanced portfolio?

A balanced portfolio is characterized by a mix of different asset classes to achieve an optimal risk/return balance. This approach seeks to diversify investments across various asset categories—such as stocks, bonds, and cash equivalents—allowing an investor to manage risk effectively while aiming for consistent returns.

Diversification is key in reducing overall portfolio volatility since different asset classes often react differently to market conditions. For instance, stocks tend to offer higher returns but also come with higher risks, while bonds can provide stability and income, albeit usually at lower returns. By balancing these different investments, an investor can tailor their portfolio to align with their risk tolerance and financial goals.

In contrast, investing entirely in stocks or concentrating all assets in a single asset class, such as real estate, exposes the investor to significant risks associated with that particular market. Including only cash and cash equivalents offers liquidity and safety but typically results in lower returns, failing to capitalize on potential market growth. Therefore, the concept of a balanced portfolio emphasizes diversification among various asset classes to create a more resilient investment strategy.