Walter has his entire portfolio invested in the stock of the company where he works. He is considering purchasing one of four ETFs, each of which has the same expected return, but has a different correlation with his portfolio. Walter should choose the ETF that has a correlation of:
A) -0.3.
B) 0.0.
C) 0.5.
D) 1.0.

Question

Quizplus · Accepted Answer

Walter should choose the ETF with the lowest correlation to his current portfolio to maximize diversification benefits and reduce risk. A correlation of -0.3 provides the best diversification.

Walter Has His Entire Portfolio Invested in the Stock of the Company