An equity portfolio manager can neutralise 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) any of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The best choice to neutralize the risk of falling stock prices is to enter into a hedge position that is negatively correlated with the existing exposure. This means that if the value of the portfolio decreases, the value of the hedge position will increase, counteracting the losses in the portfolio.

An Equity Portfolio Manager Can Neutralise the Risk of Falling