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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. |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
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® 2024 Level I Curriculum, Volume 2, Module 1.