Which of the following combinations would result in a portfolio with the lowest risk?
A)Two stocks which are perfectly negatively correlated
B)Two stock which are uncorrelated
C)Two stocks which are perfectly correlated with the market
D)Two stocks with perfect positive correlation

Question

Quizplus · Accepted Answer

When two stocks are perfectly negatively correlated, they have a correlation coefficient of -1, which means that they move in opposite directions. As a result, when one stock is performing poorly, the other stock will perform well and vice versa. This has the effect of reducing the overall risk of the portfolio, as the losses on one stock will be offset by the gains on the other stock, resulting in a more stable return.

Which of the Following Combinations Would Result in a Portfolio