Which of the Following Is TRUE About Diversification

question 83

Multiple Choice

Which of the following is TRUE about diversification?

• A)By diversifying, portfolio risk can be reduced to zero.
• B)There is no benefit from diversification if the correlation coefficient is 1.
• C)The variance is the weighted average of the individual securities' variances when the correlation is equal to -1.
• D)If the covariance between two securities is negative, then the portfolio's standard deviation can be reduced to zero.

---

Definitions:

Domestic Money Market

A section of the financial market where domestic short-term borrowing and lending of funds occur.

Forward Market

A financial market in which participants can enter into contracts to buy or sell assets at a specified future date and price.

Spot Market

The Spot Market is a public financial market in which financial instruments or commodities are traded for immediate delivery.

Foreign Currency

The currency of another country, which is required for foreign trade and investment.