If two investments are uncorrelated:
A) there is no benefit from diversification.
B) there is no benefit to hedging.
C) diversification reduces risk without changing the expected payoff.
D) diversification reduces both risk and the expected payoff.

Question

Quizplus · Accepted Answer

Two uncorrelated investments have no relationship to each other, meaning that their performances do not move in sync with each other. Therefore, by combining these two investments in a portfolio, an investor can reduce their overall risk without decreasing their expected payoff. This is the benefit of diversification.

If Two Investments Are Uncorrelated