Portfolio diversification reduces variability because stock prices:

Multiple Choice

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

• 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.

• are perfectly correlated so there is no variability between stocks.

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

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