Which of the following statements about correlation is correct?
A)If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance that is less than that of the individual stocks.
B)If a stock has a negative correlation with market, its systematic risk is more than the market risk.
C)Stocks that have correlation coefficients equal to zero will have minimum diversification benefits.
D)The weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio.
E)Risk is reduced when positively-related stocks are combined to form portfolios, especially when the correlation coefficients are equal to +1.

Question

Quizplus · Accepted Answer

The statement that the weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio is correct. A lower correlation coefficient indicates that the two stocks are less likely to move in the same direction at the same time, therefore combining them in a portfolio results in greater diversification benefits and lower overall risk.

Which of the Following Statements About Correlation Is Correct