Question

which of the following is true of portfolio diversification? a diversified portfolio containing positively correlated investments has a higher variance than a portfolio containing a single asset type a diversified portfolio containing negatively correlated investments has a higher variance than a portfolio containing a single asset type. a diversified portfolio containing positively correlated investments has a lower variance than a portfolio containing a single asset type. a diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type.

Explanation:

Portfolio diversification aims to reduce risk (variance). When investments are negatively correlated, their price movements offset each other. A single - asset portfolio has the variance of that one asset. A diversified portfolio with negatively - correlated investments combines assets whose fluctuations counteract, leading to lower overall variance. For positively - correlated investments, diversification still reduces variance but less effectively than with negative correlation. Option A and C are wrong as positive correlation diversification doesn't have higher variance than single - asset, and positive correlation diversification's variance reduction is less than negative. Option B is wrong as negative correlation diversification should lower variance. So the correct statement is about a diversified portfolio with negatively - correlated investments having lower variance than a single - asset portfolio.

Answer:

A diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type.