If two investments are uncorrelated
A) There is no benefit from diversification
B) There is no benefit to hedging
C) Diversification reduces risk without changing the expected payoff
D) Diversification reduces both risk and the expected payoff

Question

Quizplus · Accepted Answer

When two investments are uncorrelated, diversification reduces risk without changing the expected payoff. This is because uncorrelated investments have no relation to each other, meaning that the risk reduction comes from the fact that the investments do not move in tandem with each other, so a loss in one investment does not necessarily mean a loss in the other investment. Thus, by investing in uncorrelated assets, investors can decrease overall portfolio risk without sacrificing potential returns, which is the benefit of diversification.

If Two Investments Are Uncorrelated