If two events are positively correlated but NOT perfectly correlated, then
A)diversification is not necessary since there is no risk.
B)diversification eliminates all risk.
C)diversification does not reduce risk at all.
D)diversification can reduce risk.

Question

Quizplus · Accepted Answer

Positive correlation indicates that the two events tend to move in the same direction, but not necessarily by the same amount. Therefore, diversification can still reduce risk as it involves spreading the investment across multiple assets that may not move in the same direction or by the same amount.

If Two Events Are Positively Correlated but NOT Perfectly Correlated