Which of the following statements is true in the context of diversification?

Question

Quizplus · Accepted Answer

Diversification involves investing in a variety of assets in order to reduce risk. As long as the return on different investments is not perfectly positively correlated (i.e. they do not move in the same direction at the same time), financial intermediaries can diversify away significant amounts of portfolio risk. This is because if one investment performs poorly, it is likely that another investment in the portfolio will not be affected in the same way, reducing the overall risk of the portfolio. However, if the returns on different investments are perfectly positively correlated, diversification will not be effective in reducing risk as all investments will move in the same direction at the same time.

Which of the Following Statements Is True in the Context