If asset returns are less than perfectly correlated, portfolio diversification
A) reduces systematic risk.
B) reduces nonsystematic risk.
C) increases systematic yields.
D) reduces systematic yields.

Question

Quizplus · Accepted Answer

Diversification reduces nonsystematic risk, which is the risk specific to individual assets, by spreading investments across various assets, thus reducing the impact of any single asset's performance on the portfolio's overall performance. Systematic risk, which affects the entire market, cannot be eliminated through diversification.

If Asset Returns Are Less Than Perfectly Correlated, Portfolio Diversification