Explanation:
While it is generally more desirable to have assets with negative or low covariance for better diversification benefits, positive covariance does not necessarily mean that diversification is impossible. Even with positive covariance, it is still possible to achieve some level of diversification by carefully selecting assets with different risk-return characteristics and correlation structures.
A is incorrect: The higher the covariance, the lesser the diversification benefits. C is incorrect: Diversification is indeed possible with positive covariance, although its benefits might be lower compared to assets with negative or low covariance. D is incorrect: Covariance is a crucial factor in portfolio diversification. It helps investors
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Q.2464 A fund manager is studying the relationship between covariance and diversification. Which of the following statements would be correct for the manager to make in this context?
A
A higher covariance implies a stronger relationship between the assets' returns, indicating more diversification benefits.
B
We can still achieve diversification with positive covariance.
C
Diversification is not possible with positive covariance.
D
Covariance is not relevant to diversification.
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