As long as their correlation coefficient is less than 1, risk is being reduced by adding investments to the pool.

Question

Quizplus · Accepted Answer

This statement is true. When investments have a correlation coefficient less than 1, they are not perfectly positively correlated, meaning they do not move in the exact same direction at the exact same time. Therefore, adding these investments to a portfolio can help to diversify the risk and reduce overall portfolio risk. However, it is important to note that adding negatively correlated investments (with a correlation coefficient less than 0) can further reduce portfolio risk.

As Long as Their Correlation Coefficient Is Less Than 1