Diversification has value that results from risk reduction that occurs when:

Question

Quizplus · Accepted Answer

Diversification reduces risk when the returns on combined assets are uncorrelated, meaning that the performance of one asset is not dependent on the performance of another asset. This allows for a reduction in overall portfolio risk, as losses from one asset may be offset by gains in another. When returns are perfectly correlated (A) or inversely related to the business cycle (B), diversification may not provide as much risk reduction.

Diversification Has Value That Results from Risk Reduction That Occurs