You are comparing five separate portfolios comprised of two stocks each that have varying characteristics.Which characteristic is most indicative of a diversified portfolio?
A)The standard deviation of the portfolio equals the weighted average standard deviation of the two securities.
B)The correlation between the two securities is equal to zero.
C)The covariance of the two securities is equal to one.
D)There is a highly positive covariance between the two securities.
E)The correlation between the two securities is negative.

Question

Quizplus · Accepted Answer

A negative correlation between the two securities indicates that they tend to move in opposite directions, which is a key characteristic of diversification as it can reduce overall portfolio risk.

You Are Comparing Five Separate Portfolios Comprised of Two Stocks