Portfolio with combinations of assets with low or negative correlation tend to display lower volatility than...
Portfolio with combinations of assets with low or negative correlation tend to display lower volatility than the individual assets or portfolios of assets with positive correlation? True or False and why?
Homework Answers
Correct Answer:
True
When assets are negatively correlated, then positive change in one asset are offset by the positive change in another asset. It makes portfolio to be stable in nature. If assets are positively correlated, then there will be huge gain when there is a positive change or huge loss when there is a negative gain. It makes portfolio to be highly volatile. So, negative or lower correlation helps in making portfolio to be stable.
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