Explanation

Greenfield assets refer to new investments or projects that are built from scratch, typically involving higher risk due to:

• Construction risk
• Regulatory approval uncertainty
• Market entry risk
• Higher initial capital requirements
• Unproven operational track record

Brownfield assets refer to existing investments or projects that are already operational, typically involving lower risk due to:

• Established operations
• Proven track record
• Existing cash flows
• Known regulatory environment
• Lower construction/development risk

Portfolio diversification effect: A portfolio containing both greenfield and brownfield assets benefits from diversification:

1. Risk reduction through diversification - Different risk profiles can offset each other
2. Different return characteristics - Greenfield assets typically offer higher potential returns but with higher risk, while brownfield assets offer more stable returns with lower risk
3. Reduced correlation - The two types of assets may have different risk factors and market sensitivities

Why option C is correct:

• Combining both asset types creates a more balanced portfolio
• The diversification benefit reduces overall portfolio risk compared to holding only one type of asset
• While brownfield assets alone (option B) have lower individual risk, the portfolio with both types has even lower overall risk due to diversification benefits

Key concept: In portfolio theory, diversification across assets with different risk characteristics can reduce overall portfolio risk without necessarily reducing expected returns.