During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

A) The portfolios were not adequately diversified because the assets were negatively correlated, so all of the assets had negative returns at the same time.
B) The portfolios were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time.
C) The portfolios were adequately diversified, but the assets should have been more positively correlated to protect against recession risk.
D) The investors should not have diversified their investments to protect against recession risk.

Question

Chloe Buchanan · Accepted Answer

Final Answer : B, Explanation :  The problem with these portfolios was that they were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time. In other words, the investments were not spread out enough among different types of assets that would respond differently to economic changes.

Definitions

Learning Objectives

Learning Objectives

Related questions