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

Question

Quizplus · Accepted Answer

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that are largely uncorrelated with the rest of the portfolio. This is because uncorrelated securities will not move together in the same direction, reducing the overall risk of the portfolio. If securities are perfectly correlated with each other or with the market, diversification will not be as effective in reducing risk.

The Benefits of Portfolio Diversification Are Highest When the Individual