How does the diversification of an investor's portfolio avoid risk? A. If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio increases. B. If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio increases. C. If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases. D. If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

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Business

Hebert

21 March, 14:22

How does the diversification of an investor's portfolio avoid risk? A. If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio increases. B. If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio increases. C. If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases. D. If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

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Madalyn Mcmahon · Answer 1

Letter C is correct. If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

Explanation:

Diversification in an investor's portfolio occurs when funds are invested in investments with a variety of sectors and instruments. The benefit of this loss mitigation technique is that diversification increases the return on the investment portfolio, as different assets may behave differently in one event, which reduces risk.