fun quiz

better, should

a better diversification asset should have:
A high volatility and low correlation
B low volatility and low correlation
C low correlation regardless the volatility

lcw77

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发表于 2011-7-13 15:33 | 只看该作者

A.

High vol and negative would be best.

You want the asset to move a lot and be uncorrelated/negatively correlated with the portfolio.

Bingo!

Edited 1 time(s). Last edit at Thursday, June 2, 2011 at 12:32PM by Paraguay.

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mcmc

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发表于 2011-7-13 15:33 | 只看该作者

If we have our current portfolio which has, say a standard deviation of 15%, we want to add a diversifying asset to this portfolio.

We have 2 options:

Asset 1: standard deviation = 18% and correlation = 0.2
Asset 2: standard deviation = 50% and correlation = 0.2

Which one is the better diversifier?

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Windjam

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发表于 2011-7-13 15:34 | 只看该作者

A

As Paraguay rightly pointed it.
Think about it from a covariance perspective. Wouldn't you prefer an asset with a correlation of -1 and a high SD to give a large negative number that reduces your new SD

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cityboy