Answer (A) is correct . A common general definition is that risk is an investment with an unknown outcome but a known probability distribution of returns (a known mean and standard deviation). An increase in the standard deviation (variability) of returns is synonymous with an increase in the riskiness of a project. Risk is also increased when the project’s returns are positively (directly) correlated with other investments in the company’s portfolio; that is, risk increases when returns on all projects rise or fall together. Consequently, the overall risk is decreased when projects have low variability and are negatively correlated (the diversification effect).
Answer (B) is incorrect because Uncorrelated investments are more risky than negatively correlated investments.
Answer (C) is incorrect because Correlated investments are very risky.
Answer (D) is incorrect because Correlated investments are very risky.
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