Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

Question

Quizplus · Accepted Answer

Diversification can reduce portfolio risk even if the returns on the loans in the portfolio are not negatively correlated; it is sufficient if they are not perfectly positively correlated. Diversification spreads out risk across different investments, reducing the impact of any single investment's poor performance on the overall portfolio.

Portfolio Risk Can Be Reduced Through Diversification Only If the Returns