Which portfolio theory concept states that combining assets with imperfect positive correlation reduces overall portfolio risk?
ADiversification Effect (Markowitz Modern Portfolio Theory)
BEfficient Market Hypothesis
CArbitrage Pricing Theory
DCapital Market Line
Explanation
* Harry Markowitz demonstrated that asset correlation (< +1.0) allows investors to reduce portfolio variance (unsystematic risk) without sacrificing expected return. * Systematic (market) risk cannot be eliminated through diversification. * Foundation of Modern Portfolio Theory (MPT).
Exam Relevance
- Topic: Portfolio Management
- Subtopic: Modern Portfolio Theory
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