An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are
A) not correlated with the existing exposure.
B) positively correlated with the existing exposure.
C) negatively correlated with the existing exposure.
D) at breakeven with the existing exposure.
E) imperfectly correlated with the existing exposure.

Question

Quizplus · Accepted Answer

Negatively correlated hedge positions move in the opposite direction of the existing exposure, providing a partial or full offset to any declines in the portfolio value. This helps the portfolio manager to neutralize the risk of falling stock prices.

An Equity Portfolio Manager Can Neutralize the Risk of Falling