Diversification of a portfolio leads to:
A)a negative correlation between the investments.
B)a lower mean of returns.
C)a lower variance of returns.
D)a higher standard deviation of returns.

Question

Quizplus · Accepted Answer

Diversification of a portfolio leads to a lower variance of returns, as it reduces the overall risk of the portfolio. This is because different investments tend to perform differently under different market conditions, so a mix of investments can help balance out the ups and downs, leading to a more stable overall return. While diversification can lead to a lower mean of returns, this is not always the case, and it is generally accepted that the benefits of risk reduction outweigh any potential downside in average returns. A negative correlation between investments is not necessarily a result of diversification, as it depends on the specific investments chosen. And a higher standard deviation of returns is not desirable, as it indicates greater volatility and risk.

Diversification of a Portfolio Leads To