If two events are perfectly negatively correlated, then
A)diversification can reduce but not eliminate risk.
B)diversification can eliminate risk.
C)diversification has no impact on risk.
D)diversification cuts risk in half.

Question

Quizplus · Accepted Answer

If two events are perfectly negatively correlated, it means that when one event occurs, the other event will not occur. In this case, diversification across these two events can completely eliminate risk. For example, investing in both a company that makes umbrellas and a company that makes sunglasses can completely eliminate the risk of weather affecting sales for either company.

If Two Events Are Perfectly Negatively Correlated, Then