Which of the following concerns is likely to be most important to portfolio investors seeking diversification?
A)total volatility of individual securities.
B)standard deviation of individual securities.
C)correlation of returns between securities.
D)achieving the risk-free rate of return.

Question

Quizplus · Accepted Answer

The correlation of returns between securities is the most important concern for portfolio investors seeking diversification because it determines how much risk reduction can be achieved by combining different securities. Ideally, investors want investments that have low correlations or are negatively correlated so that when one investment is performing poorly, the other investment(s) can offset the losses. The total volatility and standard deviation of individual securities are still important considerations, but they do not have as much impact on diversification as correlation. Achieving the risk-free rate of return is not relevant to diversification since it is a measure of a single investment's return, and diversification involves combining multiple investments.

Which of the Following Concerns Is Likely to Be Most