The benefits of portfolio diversification are highest when the individual securities have returns that:
A) vary directly with the rest of the portfolio.
B) vary proportionally with the rest of the portfolio.
C) are less than perfectly correlated with the rest of the portfolio.
D) are countercyclical.

Question

Quizplus · Accepted Answer

Portfolio diversification is a risk management strategy that involves investing in a variety of assets to reduce the overall risk of the portfolio. The benefits of diversification are highest when the individual securities in the portfolio are less than perfectly correlated with each other. This means that the returns of the securities do not move in the same direction at the same time. If the individual securities are perfectly correlated, the benefits of diversification are reduced because they all move in the same direction at the same time, and the portfolio will be more vulnerable to market fluctuations. Therefore, option C is the best choice because it states that the individual securities have returns that are less than perfectly correlated with the rest of the portfolio.

The Benefits of Portfolio Diversification Are Highest When the Individual