For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?
A. Security A with a correlation coefficient of -0.0
B. Security B with a correlation coefficient of 0.0
C. Security C with a correlation coefficient of -0.50
D. Security D with a correlation coefficient of 0.50
For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?
| A. Security A with a correlation coefficient of -0.0 | |
| B. Security B with a correlation coefficient of 0.0 | |
| C. Security C with a correlation coefficient of -0.50 | |
| D. Security D with a correlation coefficient of 0.50 |
Related questions
The variance for Steady Corpâs stock is 3.6%; the variance for Techie Corpâs stock is 14.4%. Whatâs the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocksâ returns is 0?
| 4.5% |
| 10.2% |
| 9% |
| 8.3% |
How would your answer to the last question change if the correlation coefficient increases?
| Variance of the portfolio increases as the correlation between the stocks increases, which means a larger degree of diversification. |
| Variance of the portfolio increases as the correlation between the stocks declines, which means a larger degree of diversification. |
| Variance of the portfolio increases as the correlation between the stocks increases, which means less diversification. |
| Variance of the portfolio increases as the correlation between the stocks declines, which means less diversification. |
1. You wish to invest in a portfolio of stocks A (50%) and B (50%). The risk free rate is 4%.
A B
Expected return (%) 10 20
Beta 1.2 1.8
Correlation coefficient between returns 0.3
Whatâs the portfolio return? (In percent without % sign, E.g. 33)
2. Whatâs the portfolio beta in Question 1?
3. The risk reduction through diversification in a portfolio of two stocks
| a. | decreases as the correlation between the stocks rises. |
| b. | (Not enough information.) |
| c. increases as the correlation between the stocks declines. |
| d. (Both statements are correct.) |
