Question

You have a portfolio comprised of two risky securities. This combination produces no diversification benefit. The lack of diversification benefits indicates the returns on the two securities:

A. are too low for their level of risk.

B. move perfectly opposite of one another.

C. are too large to offset.

D. move perfectly in sync with one another.

     E.   are completely unrelated to one another.

Answer 1

Diversification benefits can be enjoyed in a portfolio when we add assets in the portfolio which are negatively correlated to each other. For, example we choose stocks from two different, diverse industries.

Choosing stocks, that are in perfect sync with other, will not produce any diversification benefits in the portfolio.

So, the correct option is option D.

Th basic factor for diversification is the correlation between the assets, the lower the correlation , higher the benefits of diversification. The higher the correlation, lower the benefits of diversification.

Rest all options discussing size, risk are unrelated to diversification, the options are redundant,.