Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.
A) 1
B) less than 1
C) between 0 and 1
D) less than or equal to 0

Question

Quizplus · Accepted Answer

Diversification benefits are achieved when securities in a portfolio are not perfectly correlated with each other. If the correlation between securities is 1, it means they move perfectly in sync and there is no diversification benefit. If the correlation is less than 1, it means that securities move somewhat differently from each other and diversification benefits can be achieved. A correlation between 0 and 1 indicates a positive correlation, which still allows for some diversification benefits. However, if the correlation is less than or equal to 0, it indicates a negative correlation between securities, which can lead to portfolio risk that is higher than holding a single security.

Some Diversification Benefits Can Be Achieved by Combining Securities in a Portfolio