The lower the correlation between asset returns,the ________.
A)lesser the potential diversification of risk
B)greater the potential diversification of risk
C)lower the potential profit
D)lesser the assets have to be monitored

Question

Quizplus · Accepted Answer

When the correlation between asset returns is low, it means that the assets are less likely to move in the same direction at the same time. This provides greater potential for diversification of risk because by investing in different assets, the overall risk is reduced. On the other hand, when the correlation is high, it means that the assets are more likely to move together in the same direction, which reduces the potential for diversification of risk. Therefore, the lower the correlation between asset returns, the greater the potential diversification of risk.

The Lower the Correlation Between Asset Returns,the ________