1-20 The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

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Diversification allows an FI to reduce its overall risk by investing in assets that are not perfectly correlated with each other. This means that if one asset performs poorly, the others may perform well, reducing the overall impact of any single asset on the FI's balance sheet.

1-20 the Ability of Diversification to Eliminate Much of the Risk