If the correlation between two stocks is −1,the returns on the stocks:
A)generally move in the same direction.
B)move perfectly opposite to one another.
C)are unrelated to one another.
D)have standard deviations of equal size but opposite signs.
E)totally offset each other producing a rate of return of zero.

Question

Quizplus · Accepted Answer

A correlation of −1 implies a perfect negative linear relationship between the two stocks, meaning that if the return on one stock increases, the return on the other stock will decrease by the same amount. Thus, the returns move perfectly opposite to one another.

If the Correlation Between Two Stocks Is −1,the Returns on the Stocks