When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Question

Quizplus · Accepted Answer

The statement is true because when the correlation between a new stock and existing stocks in a portfolio is high, it means that the new stock moves in a similar direction with the existing stocks. Therefore, the portfolio's overall risk is not significantly affected because the portfolio already has stocks with similar risk characteristics. On the other hand, if the correlation is low or negative, the new stock can provide diversification benefits that can help lower the portfolio's overall risk.

When Adding a Randomly Chosen New Stock to an Existing