Which of the following is TRUE about diversification?
A)By diversifying, portfolio risk can be reduced to zero.
B)There is no benefit from diversification if the correlation coefficient is 1.
C)The variance is the weighted average of the individual securities' variances when the correlation is equal to -1.
D)If the covariance between two securities is negative, then the portfolio's standard deviation can be reduced to zero.

Question

Quizplus · Accepted Answer

Diversification provides benefits only when the correlation between securities is less than 1. If the correlation is 1, then the movements of the securities are perfectly correlated, and diversification will not reduce portfolio risk.

Which of the Following Is TRUE About Diversification