Combining uncorrelated assets can reduce risk-not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.

Question

Quizplus · Accepted Answer

Combining uncorrelated assets can lead to a reduction in overall portfolio risk because the fluctuations in one asset's value will have little to no effect on the other asset's value. However, the reduction in risk is not as significant as combining negatively correlated assets, where the fluctuations in one asset's value tend to be offset by fluctuations in the other asset's value. On the other hand, combining positively correlated assets would increase the overall risk since the fluctuations in one asset's value would tend to be mirrored by the fluctuations in the other asset's value.

Combining Uncorrelated Assets Can Reduce Risk-Not as Effectively as Combining