Which of the following concerns is likely to be most important to portfolio investors seeking diversification?
A) Total volatility of individual securities
B) Standard deviation of individual securities
C) Correlation of returns between securities
D) Achieving the risk-free rate of return

Question

Quizplus · Accepted Answer

Portfolio investors seeking diversification are concerned about reducing overall risk by investing in a mix of different securities. Correlation of returns between securities is an important factor in achieving this as securities with low correlation can reduce the overall volatility of the portfolio. Thus, choice C is likely to be the most important concern to portfolio investors seeking diversification. While total volatility and standard deviation are important measures of risk, they only consider individual securities and do not address the overall risk of a portfolio. The risk-free rate of return is not relevant to portfolio diversification as it refers to a single investment that carries no risk.

Which of the Following Concerns Is Likely to Be Most