Diversification reduces the riskiness of a financial portfolio provided
A)the portfolio does not contain too many different assets.
B)the returns on the assets in the portfolio do not vary in the same way.
C)interest rates are stable.
D)at least some tax-free assets are included.

Question

Quizplus · Accepted Answer

Diversification reduces the riskiness of a financial portfolio when the returns on the assets in the portfolio do not vary in the same way. If the returns on the assets in the portfolio vary in the same way, diversification may not be effective in reducing risk. Therefore, choice B is the best answer. Choices A, C, and D are incorrect because they do not accurately reflect the conditions necessary for diversification to reduce risk.

Diversification Reduces the Riskiness of a Financial Portfolio Provided