A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.
A) not perfectly positively correlated
B) perfectly correlated
C) susceptible to common risks only
D) both B and C

Question

Quizplus · Accepted Answer

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are not perfectly positively correlated. This is because a portfolio with stocks that are not perfectly correlated can reduce the overall risk because when one stock is performing poorly, another stock may be performing well, which helps to balance out the portfolio's overall return. If stocks are perfectly positively correlated, they move in the same direction at the same time, so diversification benefits cannot be achieved. If stocks are susceptible to common risks only, diversification benefits cannot be achieved as well, because they will move in the same direction in response to those risks.

A Portfolio of Stocks Can Achieve Diversification Benefits If the Stocks