The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.

Question

Quizplus · Accepted Answer

When two securities have perfectly negative correlation, it means that when one security goes up, the other security goes down by the same amount. Combining such securities in a portfolio can result in the portfolio having very low volatility or risk, as gains in one security offset losses in the other. This is why perfect negative correlation is considered the ideal scenario for diversification.

The Greatest Level of Risk Reduction Through Diversification Can Be