In general, which stocks should be combined in a portfolio if the goal is to reduce overall risk?
A)Stocks with returns that are positively correlated
B)Stocks with returns that are negatively correlated
C)Stocks with returns that are not correlated
D)Stocks that have the highest expected returns

Question

Quizplus · Accepted Answer

Stocks with returns that are negatively correlated tend to move in opposite directions, so combining them in a portfolio can help to reduce overall risk. This is because if one stock experiences a decline in value, the other stock may experience an increase in value, which can offset some of the losses. Stocks with returns that are positively correlated may move in the same direction, so combining them in a portfolio can lead to increased risk. Stocks that are not correlated may provide some diversification benefits, but combining negatively correlated stocks is generally considered the best approach for reducing overall portfolio risk. Stocks that have the highest expected returns may offer potentially higher rewards, but they also tend to come with higher risk, so they may not be the best choice for reducing overall portfolio risk.

In General, Which Stocks Should Be Combined in a Portfolio