Final answer:
True. You would prefer to add a security that is negatively correlated with your existing securities to reduce portfolio risk through diversification.
Step-by-step explanation:
True. If you have a portfolio and want to add a security to reduce your total portfolio risk, you would prefer to add one that is negatively correlated with the other securities you hold. By incorporating assets that are negatively correlated, the portfolio's overall risk can be diminished because when one asset goes down, the negatively correlated asset tends to go up, offsetting the loss. This practice is part of diversification which aims to maximize returns by investing in different areas that would each react differently to the same event. Diversification is a critical concept in portfolio management, where investors spread their investments across various financial instruments, industries, and other categories to minimize exposure to any single asset or risk. A diversified portfolio is less likely to be adversely affected by a single event or market movement, and a negative correlation among assets is one way to achieve this diversification. It is essential to note that portfolio risk reduction does not guarantee economic success, but it does help in managing and mitigating potential losses.