A portfolio manager is considering adding another security to his portfolio.The correlations of the 5 alternatives available are listed below.Which security would enable the highest level of risk diversification?
A) 0.0
B) 0.25
C) -0.25
D) -0.75
E) 1.0

Question

Quizplus · Accepted Answer

The highest level of risk diversification would be achieved by selecting a security with a correlation that is negative or close to zero with the existing securities in the portfolio. Among the options provided, the security with a correlation of -0.75 would offer the highest level of diversification. Negative correlation indicates that the returns of the security move in the opposite direction to the returns of the other securities, which helps to reduce the overall portfolio risk.

A Portfolio Manager Is Considering Adding Another Security to His