When combining many assets into a portfolio the correlation between the variables has a(n)____ impact on the overall risk of the portfolio than the overall risk of each asset.
A) larger
B) equal
C) smaller
D) none of the above

Question

Quizplus · Accepted Answer

Correlation measures how assets move in relation to each other. When combining many assets into a portfolio, the correlation between the variables has a larger impact on the overall risk of the portfolio than the overall risk of each asset. This is because if assets are highly correlated, they tend to move in the same direction, increasing the overall risk of the portfolio. Conversely, if assets are negatively correlated, they tend to move in opposite directions, reducing the overall risk of the portfolio. Therefore, it is important to consider correlation when constructing a portfolio to manage risk.

When Combining Many Assets into a Portfolio the Correlation Between