When investment returns are less than perfectly positively correlated,the resulting diversification effect means that:
A) making an investment in two or three large stocks will eliminate all of the unsystematic risk.
B) making an investment in three companies all within the same industry will greatly reduce the systematic risk.
C) spreading an investment across five diverse companies will not lower the total risk.
D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
E) spreading an investment across many diverse assets will eliminate some of the total risk.

Question

Quizplus · Accepted Answer

Diversification across many diverse assets will not eliminate all of the systematic risk, but it will reduce some of the total risk. By investing in assets with less than perfectly positively correlated returns, the diversification effect means that losses in one asset may be offset by gains in another, reducing the overall risk of the investment portfolio. Spreading the investment across five diverse companies may also lower the total risk, but diversifying across many assets is typically more effective. A, B, and D are incorrect statements.

When Investment Returns Are Less Than Perfectly Positively Correlated,the Resulting