For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals
A)+1.0.
B)-0.5.
C)-1.0.
D)0.0.

Question

Quizplus · Accepted Answer

The correlation coefficient ranges between -1 and +1, with -1 indicating perfect negative correlation and +1 indicating perfect positive correlation. A correlation coefficient of -1 means that the stocks move in opposite directions, thereby having the maximum reduction in risk. Therefore, the correct option is (C) -1.0.

For a Two-Stock Portfolio, the Maximum Reduction in Risk Occurs