Diversification reduces the variability of returns if the correlation among security returns is:
A) High.
B) Low.
C) The same.
D) Indifferent.
E) None of the above.

Question

Quizplus · Accepted Answer

Diversification reduces the variability of returns most effectively when the correlation among security returns is low. This is because low or negative correlation between assets means that when some assets are performing poorly, others may be performing well, thus reducing the overall risk of the portfolio.

Diversification Reduces the Variability of Returns If the Correlation Among