Portfolio diversification is ineffective when
A) assets in the portfolio have precisely the same pattern of returns.
B) assets in the portfolio have negative correlations.
C) assets in the portfolio are uncorrelated.
D) Portfolio diversification is ineffective in each of the above scenarios.

Question

Quizplus · Accepted Answer

Portfolio diversification is ineffective when assets in the portfolio have precisely the same pattern of returns. This is because when all assets in a portfolio move in the same direction and by the same amount, diversification cannot reduce the overall risk of the portfolio. In this case, the portfolio is said to have no diversifiable risk. In the other scenarios (B and C), diversification is effective to some extent, and can reduce the overall risk of the portfolio.

Portfolio Diversification Is Ineffective When