If the correlation between two assets is __________, all risk can be eliminated in a portfolio.
A) - 100
B) - 1
C) 0
D) + 1
E) + 100

Question

Quizplus · Accepted Answer

A correlation coefficient of -1 indicates a perfect negative correlation between the two assets. In such a scenario, the returns from the two assets move exactly in the opposite direction. This means that combining the two assets in a portfolio minimizes the overall risk because the losses from one asset are offset by gains from the other asset. As a result, a portfolio can be constructed with zero risk, and only the expected return will determine the portfolio's performance. However, it is important to note that a perfect negative correlation does not imply that the returns from the two assets will be stable or predictable.

If the Correlation Between Two Assets Is __________, All Risk