Risk Attribution

Using a bottom-up risk attribution analysis, a security is found to have a negative contribution to portfolio risk. This result suggests:

Incorrect. This is quite possible when you recall Markowitz portfolio theory.

Right! The security either has lower total risk than that of the overall portfolio, or has a low correlation with the portfolio. Either way, it is providing diversification benefits to display a negative marginal contribution to portfolio risk.

Incorrect. Nothing concrete can be suggested about relative mean returns in this case.

there must be an error.

the security provides diversification benefits.

the security's mean returns must be less than those of the portfolio.