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Portfolio diversification in the realm of private equity refers to the strategy of investing in a variety of companies or sectors to reduce risk. This approach is grounded in the principle that spreading investments across different assets can minimize the overall impact of poor performance in any single investment. By holding a diverse range of investments, a private equity firm can achieve a balance that mitigates the risks associated with individual companies or specific sectors experiencing downturns, thereby enhancing the potential for stable returns over time.

The diversification strategy allows investors to participate in various market segments and economic conditions, which can lead to more robust portfolio performance. For example, if one sector underperforms, the gains from another sector may help offset those losses, leading to less volatility in the overall portfolio. In private equity, where investments may have long holding periods and can be illiquid, this risk management approach is critical in both protecting capital and seeking competitive returns.

The other options do not accurately reflect the concept of diversification. Investing in a singular profitable company lacks the breadth necessary for diversification, while focusing exclusively on high-risk industries would increase risk rather than reduce it. Selling off all assets regularly does not represent a coherent strategy aimed at diversification; instead, it suggests a lack of commitment to any long-term investment strategy. Thus