The benefits of diversification are greatest when asset returns have:
A) negative correlations
B) positive correlations
C) zero correlations
D) low positive covariances

Question

Quizplus · Accepted Answer

Negative correlations between asset returns means that when one asset's return is high, the other's is low, and vice versa. This leads to a lower overall risk of the portfolio as losses in one asset can be offset by gains in another, thus increasing the diversification benefits.

The Benefits of Diversification Are Greatest When Asset Returns Have