mouse123

As the correlation between the returns of two assets becomes lower, the risk reduction potential becomes:

A) smaller.

B) greater.

C) decreased by the same level.

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Perfect positive correlation (r = +1) of the returns of two assets offers no risk reduction, whereas perfect negative correlation (r = -1) offers the greatest risk reduction.

mouse123

Adding a stock to a portfolio will reduce the risk of the portfolio if the correlation coefficient is less than which of the following?

A) 0.00.

B) +1.00.

C) +0.50.

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Adding any stock that is not perfectly correlated with the portfolio (+1) will reduce the risk of the portfolio.

mouse123

Stock A has a standard deviation of 4.1% and Stock B has a standard deviation of 5.8%. If the stocks are perfectly positively correlated, which portfolio weights minimize the portfolio’s standard deviation?

Stock A

Stock B

A) 63% 37%

B) 0% 100%

C) 100% 0%

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Because there is a perfectly positive correlation, there is no benefit to diversification. Therefore, the investor should put all his money into Stock A (with the lowest standard deviation) to minimize the risk (standard deviation) of the portfolio.