Portfolio diversification reduces variability because stock prices:

Multiple Choice

$01$:$14$:$26$

are perfectly correlated so there is no variability between stocks.

are uncorrelated so there is no relationship between returns of different stocks.

tend to be negatively correlated so changes in one stock are almost completely offset by changes in other stocks.

do not move exactly together, so changes in one stock are partially offset by changes in other stocks.

are perfectly negatively correlated so an increase in one is perfectly offset by a decrease in another.