Consider the characteristics of the following three stocks: $$\begin{array} { l l l }
\hline & \begin{array} { l }
\text { Expected } \
\text { Return }
\end{array} & \begin{array} { l }
\text { Standard } \
\text { Deviation }
\end{array} \
\hline \begin{array} { l }
\text { Thumb } \
\text { Devices }
\end{array} & 13 \% & 23 \% \
\text { Air Comfort } & 10 \% & 19 \% \
\text { Sport Garb } & 10 \% & 17 \% \
\hline
\end{array}$$ The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is -0.85. If you can pick only two stocks for your portfolio, which would you pick? Why?
A)Combine Thumb Devices and Sport Garb because they have a high correlation.
B)Combine Thumb Devices and Air Comfort because of high standard deviations.
C)Combine Air Comfort and Sport Garb due to negative correlation.
D)Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Question

Consider the characteristics of the following three stocks: $$\begin{array} { l l l } 
\hline & \begin{array} { l } 
\text { Expected } \
\text { Return }
\end{array} & \begin{array} { l } 
\text { Standard } \
\text { Deviation }
\end{array} \
\hline \begin{array} { l } 
\text { Thumb } \
\text { Devices }
\end{array} & 13 \% & 23 \% \
\text { Air Comfort } & 10 \% & 19 \% \
\text { Sport Garb } & 10 \% & 17 \% \
\hline
\end{array}$$ The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is -0.85. If you can pick only two stocks for your portfolio, which would you pick? Why?
A)Combine Thumb Devices and Sport Garb because they have a high correlation.
B)Combine Thumb Devices and Air Comfort because of high standard deviations.
C)Combine Air Comfort and Sport Garb due to negative correlation.
D)Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Quizplus · Accepted Answer

When selecting stocks for a portfolio, it is important to consider not only their individual characteristics but also their correlation with other stocks to ensure proper diversification. The negative correlation between Air Comfort and Sport Garb indicates that they tend to move in opposite directions, which can help reduce overall portfolio risk. Additionally, while Thumb Devices has the highest expected return, it also has the highest standard deviation, which increases the risk of adding it to a portfolio. Therefore, selecting Air Comfort and Sport Garb would provide a balance between expected return and risk reduction through negative correlation.

Consider the Characteristics of the Following Three Stocks The Correlation Between Thumb Devices and Air Comfort Is -0