How can the addition of uncorrelated assets benefit a portfolio?

The addition of uncorrelated assets to a portfolio can stabilize returns during market fluctuations. When assets have low or no correlation with one another, they respond differently to market changes. This means that when some investments may be underperforming, others could be performing well, thus reducing the overall volatility of the portfolio.

In times of market stress, the uncorrelated assets can help cushion against dramatic declines in value, as they often will not react in the same way to economic or market events. This diversification effect leads to a smoother return profile over time, as the ups and downs of individual assets do not all coincide. This balance helps investors achieve a more stable investment experience, which is a key principle in risk management and portfolio construction.

The other options don't align with this fundamental concept of diversification: increasing overall risk contradicts the purpose of adding uncorrelated assets; improving average returns is not guaranteed since performance can vary widely based on market conditions; and ensuring uniform sector investment runs counter to the idea of mixing different types of assets to achieve better overall stability and risk management.