The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that:
A) vary directly with the rest of the portfolio.
B) vary proportionally with the rest of the portfolio.
C) are less than perfectly correlated with the rest of the portfolio.
D)are perfectly correlated with the market portfolio.

Question

Quizplus · Accepted Answer

Portfolio diversification helps to reduce risk by investing in assets that are less than perfectly correlated with each other. This means that if one asset performs poorly, it will not necessarily drag down the performance of the entire portfolio. Therefore, the benefits of diversification are highest when the individual securities within the portfolio have returns that are less than perfectly correlated with the rest of the portfolio. Options A and B, which suggest that returns should vary directly or proportionally with the rest of the portfolio, are not consistent with the goal of diversification. Option D, which suggests that securities should be perfectly correlated with the market portfolio, also does not promote diversification.

The Benefits of Portfolio Diversification Are Highest When the Individual