In order to benefit from diversification, the returns on assets in a portfolio must:
A)Be perfectly positively correlated
B)Be perfectly negatively correlated
C)Not be perfectly positively correlated
D)Have the same idiosyncratic risks

Question

Quizplus · Accepted Answer

Diversification is the strategy of reducing risk by investing in a variety of assets that are not perfectly correlated with each other. If the returns on assets are perfectly positively or negatively correlated, diversification will not be effective in reducing risk. However, if the returns on assets are not perfectly positively correlated, diversification can help reduce the overall risk of the portfolio. Having the same idiosyncratic risks does not necessarily affect the benefits of diversification.

In Order to Benefit from Diversification, the Returns on Assets