When many assets are included in a portfolio or index the risk of the portfolio or index will be:
A) less than the risk of the securities because the correlations are greater than 1.
B) equal to the risk of the securities because the correlations are equal to 1.
C) less than the risk of the securities because the correlations are usually less than 1.
D) unaffected by the risk of securities because their correlations are less than 1.

Question

Quizplus · Accepted Answer

Diversification benefits arise because the correlations between asset returns are usually less than 1, allowing for a reduction in portfolio risk compared to the average risk of the individual securities.

When Many Assets Are Included in a Portfolio or Index