For purposes of maximum portfolio diversification, which for the following would provide the greatest diversification?
A) Security A with a correlation coefficient of -0.0
B) Security B with a correlation coefficient of 0.0
C) Security C with a correlation coefficient of -0.50
D) Security D with a correlation coefficient of 0.50

Question

Quizplus · Accepted Answer

A correlation coefficient of -0.50 indicates a negative correlation which means that Security C moves in an opposite direction to the other securities in the portfolio. This provides the greatest diversification because it can help to reduce the overall volatility and risk of the portfolio. The other options (A, B, and D) do not provide as much diversification because they either have no correlation or a low positive correlation with the other securities in the portfolio.

For Purposes of Maximum Portfolio Diversification, Which for the Following