Carl plans to add one of two alternative stocks to his portfolio. Stock A has a correlation of 0.70 with his portfolio and Stock B has a correlation of 0.10. Both stocks have the same standard deviation of returns. Based on this information, relative to Stock A, Stock B will result in:
A) more total risk and less active risk for the portfolio.
B) less total risk and more active risk for the portfolio.
C) more total risk and more active risk for the portfolio.
D) less total risk and less active risk for the portfolio.

Question

Quizplus · Accepted Answer

Stock B, with a lower correlation to the portfolio, will reduce total risk more than Stock A. However, it will introduce more active risk due to its lower correlation.

Carl Plans to Add One of Two Alternative Stocks to His