Final answer:
The statement is true; lower correlation between stocks leads to greater diversification in a portfolio, reducing unsystematic risk and potentially smoothing out investment performance.
Step-by-step explanation:
The statement is true; the lower the correlation between two stocks, the more diversification benefits you gain when combining them into a portfolio. When stocks are not closely correlated, their price movements are less likely to move in the same direction at the same time. So, if one stock's value decreases, the other's may not, which can help to offset potential losses.
Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories in order to reduce the impact of any one investment's poor performance. By investing in a mixture of assets with little to no correlation, investors can potentially smooth out unsystematic risk significantly, as the performance of one investment is less likely to directly affect the performance of the others.
Investing in mutual funds can be a practical way to achieve diversification, as these funds pool money from many investors to buy a diversified portfolio of stocks or bonds. This approach aligns with the concept of not putting all your eggs in one basket, thereby reducing the risk inherent in individual securities.