adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Question

Quizplus · Accepted Answer

This statement is true. The higher the degree of correlation between the new stock and the existing stocks in the portfolio, the more likely it is that the new stock will move in the same direction as the existing stocks. This means that the portfolio's risk will be less affected by the addition of the new stock. On the other hand, if the new stock has a low correlation with the existing stocks, it may move in a different direction, increasing the portfolio's overall risk.

Adding a Randomly Chosen New Stock to an Existing Portfolio