As long as returns among various financial instruments are not perfectly correlated, diversification _______ risk for any given expected return.

Question

Quizplus · Accepted Answer

Diversification reduces risk because it spreads an investor's funds among different types of investments. As a result, if one investment performs poorly, the loss may be offset by gains in other investments. The less correlated the returns of those investments are, the greater the potential for risk reduction.

As Long as Returns Among Various Financial Instruments Are Not