Consider the following correlation coefficient for stocks M, N, P and Q. Which portfolio will have the least diversification benefit? $$\begin{array} { | l | r | r | r | r | }
\hline & \text { Stock M } & \text { Stock N } & \text { Stock P } & \text { Stock Q } \
\hline \text { Stock M } & 1.000 & & & \
\hline \text { Stock N } & 0.911 & 1.000 & & \
\hline \text { Stock P } & 0.543 & - 0.123 & 1.000 & \
\hline \text { Stock Q } & - 0.321 & 0.411 & 0.000 & 1.000 \
\hline
\end{array}$$
A) M and N
B) N and P
C) P and Q
D) M and P
E) N and Q

Question

Consider the following correlation coefficient for stocks M, N, P and Q. Which portfolio will have the least diversification benefit? $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Stock M } & \text { Stock N } & \text { Stock P } & \text { Stock Q } \
\hline \text { Stock M } & 1.000 & & & \
\hline \text { Stock N } & 0.911 & 1.000 & & \
\hline \text { Stock P } & 0.543 & - 0.123 & 1.000 & \
\hline \text { Stock Q } & - 0.321 & 0.411 & 0.000 & 1.000 \
\hline
\end{array}$$
A) M and N
B) N and P
C) P and Q
D) M and P
E) N and Q

Quizplus · Accepted Answer

The portfolio with the least diversification benefit is the one with the highest correlation coefficient between the stocks, which is between stocks M and N (0.911). High correlation means the stocks' returns move together more closely, reducing the diversification benefit.

Consider the Following Correlation Coefficient for Stocks M, N, P