All things equal, diversification is most effective when

A) securities' returns are positively correlated.

B) securities' returns are uncorrelated.

C) securities' returns are high.

D) securities' returns are negatively correlated.

E) A and C

D) securities' returns are negatively correlated.

Explanation:

For diversification we want to reduce risk thus, the stocks must be diverse they must be different. That means the situation under one stock increases makes the other incease that way we have a balance portfolio

We need negative correlation among securities.

D) securities' returns are negatively correlated.

Explanation:

The whole purpose of diversification is to lower risk while maintaining reasonably high returns. The whole idea behind diversification is that when a group of stocks is performing poorly, another group is doing very well.

That s exactly what negatively correlated means, when one stock is doing very well the other is doing poorly, and vice versa.