A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives available are listed below. Which security would enable the highest level of risk diversification?
A) 0.0
B) 0.25
C) - 0.25
D) - 0.75
E) 1.0

Question

Quizplus · Accepted Answer

A correlation of -0.75 indicates a strong negative relationship, which provides the highest level of risk diversification by reducing overall portfolio risk.

A Portfolio Manager Is Considering Adding Another Security to His