Question

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.
A) not perfectly positively correlated
B) perfectly correlated
C) susceptible to common risks only
D) both B and C

Answer 1

Answer:

Option A is the correct answer.

Explanation:

A portfolio can only achieve diversification benefits if the securities that make up the portfolio are negatively correlated. This is because non-performance of a stock does not affect other stocks negatively. Negatively corrected stocks are the best when it comes to portfolio selection. This will enable the investor to reduce unsystematic risk to the barest minimum.