Diversification is most effective when the returns on assets are:
A) positively correlated with the returns of other assets.
B) negatively correlated with the returns of other assets.
C) perfectly, positively correlated with the returns of other assets.
D) perfectly, negatively correlated with the returns of other assets.

Question

Quizplus · Accepted Answer

Diversification is most effective when the returns on assets are perfectly, negatively correlated with the returns of other assets. This is because negative correlation means that when one asset's return decreases, the other's increases, which reduces overall portfolio risk.

Diversification Is Most Effective When the Returns on Assets Are