You wish to diversify your single-security portfolio in a way that will maximize your reduction in risk.Which of the following securities should you add to your portfolio?
A)Treasury bills that have a correlation coefficient of 0.0 with your current security
B)Alpha Company stock that has a correlation coefficient of -0.25 with your current security
C)Beta Company stock that has a correlation coefficient of 0.50 with your current security
D)Delta Company bonds that have a correlation coefficient of 0.36 with your current security

Question

Quizplus · Accepted Answer

Adding a security with a negative correlation coefficient to your portfolio maximizes risk reduction. In this case, Alpha Company stock, with a correlation coefficient of -0.25, indicates a slight inverse relationship with your current security, thus offering diversification benefits by reducing overall portfolio risk.

You Wish to Diversify Your Single-Security Portfolio in a Way