The ability of diversification to reduce risk
A) is greater the more negatively correlated the two events are.
B) is greater the more positively correlated the two events are.
C) is greater the more uncorrelated the two events are.
D) is greater the more risk averse the individual is.

Question

Quizplus · Accepted Answer

Diversification reduces risk most effectively when the events or assets are negatively correlated, as losses in one can be offset by gains in the other.

The Ability of Diversification to Reduce Risk