The reason for diversification is to reduce the risk (variance).If the covariance is small (negative)then some portfolios have less variance than any individual securities in the portfolio.Think of the bathing suit and umbrellas company example in the Diversification video.

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The Answer of The reason for diversification is to reduce the risk (variance).If the covariance is small (negative)then some portfolios have less variance than any individual securities in the portfolio.Think of the bathing suit and umbrellas company example in the Diversification video.

The Reason for Diversification Is to Reduce the Risk (Variance)