For diversification to reduce risk,
A)the returns on the individual securities should be highly correlated
B)the prices of the stocks should be stable
C)the returns on the individual securities should be negatively correlated
D)one firm should offer dividends and the other should offer capital gains

Question

Quizplus · Accepted Answer

Diversification reduces risk by combining assets that do not move in the same direction; when the returns on individual securities are negatively correlated, losses in one can be offset by gains in another, thereby reducing overall portfolio risk.

For Diversification to Reduce Risk