In which of the following situations would you get the largest reduction in risk
by spreading your portfolio across two stocks?
a. The stock returns vary with each other.
b. The stock returns are independent.
c. The stock returns vary against each other

theoreitcally, you want ones that are perfectly inversely related. 
one goes up, one goes down by the same amount.  That would be the
perfect hedge.  I am not sure if option A or C describes this.  They
dont read well.

Just to clarify, if you want the highest risk/return, you'd shoot for
independance.  If youwant the get rid of risk, go for an inverse
relationship.

I like the clarification follow-up along with initial response

Portfolio in which you have least Correlations amongst the stocks will
have the less risk .. and it will be much lower if they are inversely
related, since in that case if one stock goes down .. the other stock
will go up..as explained by ubiquity. If you read pricing of CDS(
credit default swap) one of the key parameter in pricing is
Correlations between stocks.