Suppose you have a portfolio consisting of three stocks, and are considering the addition of a fourth stock. The possible stocks are Stock A, which has a correlation of 0.2 with the existing portfolio, and Stock B, which has a correlation of 0.4 with the existing portfolio. Which stock offers the greater diversification potential?
A) Stock A
B) Stock B

Question

Quizplus · Accepted Answer

Stock A offers greater diversification potential because it has a lower correlation (0.2) with the existing portfolio, meaning its price movements are less closely related to those of the current portfolio, thus providing better diversification benefits.

Suppose You Have a Portfolio Consisting of Three Stocks, and Are