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Basic Question 15 of 23
If you desire maximum diversification, you should search for stocks with a correlation coefficient equal to ______.
B. 0.0
C. -1.0
A. +1.0
B. 0.0
C. -1.0
User Contributed Comments 10
| User | Comment |
|---|---|
| piesiu | Why not B. |
| roark | if correlation coefficient is zero, portfolio risk (SD)is more than zero |
| soarer1 | Maximum diversification = -1 |
| magicchip | not B because then you would not be engaged in diversification. diversify = add securities which tend to move in the opposite direction of your portfolio to hedge your market risk. |
| alai2008 | with a 0 correlation returns are independent. with a correlation of -1 movements are in the opposit direction, so they offset one each other that is the main benefit of diversification. |
| zeiad | very goos thanks alai2008. |
| DonAnd | The ultimate benefit of diversification occurs when the correlation between 2 assets is -1 (when they are perfectly -vely correlated) |
| sarathbs | @Magicchip. I think it's asset risk we are hedging with -ve correlation not market. |
| thekobe | you have to focus on the std dev for a portfolio, and more specific on the covariances |
| Rachelle3 | to add to what alai2008 said the closer the number is to equalling 1 the more positively correlated they are 0.9898 is almost a perfect straight line. |
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Learning Outcome Statements
calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data
calculate and interpret portfolio standard deviation
describe the effect on a portfolio's risk of investing in assets that are less than perfectly correlated
CFA® 2025 Level I Curriculum, Volume 2, Module 1.