Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A) Market risk
B) Non-diversifiable risk
C) Systematic risk
D) Unique risk

Question

Quizplus · Accepted Answer

Investing in two assets with a correlation coefficient of -0.5 will reduce unique risk, which is also known as unsystematic risk or diversifiable risk. Correlation measures the degree to which two assets move in the same direction, and a correlation coefficient of -0.5 indicates that the two assets are negatively correlated, meaning that when one asset's price goes up, the other's price will go down. By investing in two negatively correlated assets, an investor can diversify their portfolio and reduce the risk of losing money due to the performance of only one asset. However, it does not reduce systematic risk, often referred to as market risk, which affects all assets in the market.

Investing in Two Assets with a Correlation Coefficient of -0