It is common sense that diversification is a way to decrease risk because it means that you avoid "putting all your eggs into one basket."But why is diversification important for understanding the kind of risk that matters to most investors?

Because of diversification, the risk that matters is covariance risk, not stand-alone risk.

Diversification implies that exposure to market-wide risk is not important to most investors.

Because of diversification, investors can diversify away all risk.

Because of diversification, assets' returns are not correlated.