The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of
A)−1
B)−0.5
C)0
D)0)5
E)1

Question

Quizplus · Accepted Answer

A correlation of -1 indicates perfect negative correlation between the two securities in the portfolio. This means that when one stock goes up, the other stock goes down by the same amount, and vice versa. Therefore, combining two negatively correlated stocks in a portfolio will result in diversification benefits and the highest reduction in market risk.

The Market Risk of a Portfolio of Two Stocks Will