The benefits of diversification are greatest when asset returns have:
A)low positive covariances
B)positive correlations
C)zero correlations
D)negative correlations

Question

Quizplus · Accepted Answer

Diversification benefits are greatest when asset returns have low positive covariances or negative correlations. This is because diversification reduces risk by combining assets with different return patterns. When assets have low positive covariances or negative correlations, they tend to move in opposite directions, which helps to offset losses in one asset with gains in another.

The Benefits of Diversification Are Greatest When Asset Returns Have