Question

(10 pts) Margo would like to create a portfolio of financial stocks. The goal is to maximize expected return and minimize risk (standard deviation of the portfolio's return). Should the stocks return in the portfolio highly correlated or negatively correlated? Explain your decision. 0.

Answer 1

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Answer:

So as to boost anticipated return and limit hazard, portfolio ought to have stocks that are negatively correlated. Beacause adversely related stocks move in inverse ways, so when a stock cost falls the other stock invalidates the misfortune and expands the normal return. This diminishes the danger of losing huge sums.

Negative correlations of investments are utilized with portfolio chance administration to conclude how to designate resources. Portfolio directors and speculators accept that a portion of the hazard related with the portfolio would be broadened on the off chance that they can collect an arrangement of contrarily connected resources. The procedure of gathering contrarily related resources may be fitting, for instance, if a portfolio chief is anticipating a market crash or in the midst of high volatility.