Diversification is an important strategy in portfolio management used to reduce risk by allocating investments across various financial assets, industries, and geographical regions.

By diversifying, investors can minimize the impact of volatility in returns in any single asset class on their overall portfolio performance.

Let us consider Kate's portfolio, which is divided between technology stocks, government bonds, gold, and real estate investments.

If the technology sector experiences a regulatory change, such as increased taxation, tech company stocks may decline.

Bonds and gold, which often move inversely to stocks, provide a cushion when stock markets fall.

At the same time, investments in real estate can further diversify a portfolio.

The stability in government bonds and potential gains in the gold and real estate market might compensate for the decline in the value of the technology sector stocks.

This diversification allows Kate to reduce the risks associated with a single sector and potentially reduce the portfolio's volatility.

Diversification can help Kate reduce the risk of significant loss, but it does not guarantee it will be prevented.