Portfolio theory relies on combining assets with ________ return correlation exclusively to reduce risk.

Question

Quizplus · Accepted Answer

Portfolio theory relies on combining assets with low return correlation to reduce risk. When asset returns are highly positively correlated, they tend to move in the same direction, which increases the risk of the portfolio. On the other hand, assets with low or zero correlation tend to move independently of each other, which reduces the overall risk of the portfolio. Therefore, combining assets with low return correlation is the best choice for reducing risk in a portfolio.

Portfolio Theory Relies on Combining Assets with ________ Return Correlation