You are trying to diversify your portfolio and reduce risk. Which of the following correlations between...
You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)?
Group of answer choices
-1
+1
0
-.5
Homework Answers
Answer: -1
Diversification provides maximum benefit when the correlation
between the returns of the assets in a portfolio is -1
When the correlation is negative, the direction of price movement
will be in opposite direction thus cancelling the effects of
individual asset in the portfolio.
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