Assume you are considering combining two investments to form a portfolio and you are very concerned with the risk that will result from the combination.If you want to attain the greatest effect from diversification, you would prefer that the assets are related.
A)negatively
B)positively
C)not
D)The relationship between the two investments gives no indication of the diversification effect that will result by combining them to form a portfolio.
E)Diversification is not an important factor in investment decisions.

Question

Quizplus · Accepted Answer

When assets are negatively related to each other (i.e., when one asset's return increases while the other decreases), there is a greater potential for diversification benefits. This is because combining these assets could potentially reduce overall risk in the portfolio, as the gains from one asset can offset the losses from the other.

Assume You Are Considering Combining Two Investments to Form a Portfolio