Consider the characteristics of the following three stocks:
$$\begin{array} { l c c }
& \text { Expected } & \text { Stardard } \
& \text { Returl } & \text { Devation } \
\text { Thumb Devices } & 13 \% & 23 \% \
\text { Air Corrfort } & 10 & 19 \
\text { Sport Garb } & 10 & 17
\end{array}$$
The correlation between Thumb Devices and Air Comfort is ?0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is ?0.85. If you can pick only two stocks for your portfolio, which two stocks should be included in your portfolio to eliminate the most risk? Why?
A) Combine Thumb Devices and Sport Garb because they have a high correlation.
B) Combine Thumb Devices and Air Comfort because of high standard deviations.
C) Combine Air Comfort and Sport Garb due to negative correlation.
D) Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Question

Consider the characteristics of the following three stocks:
$$\begin{array} { l c c } 
& \text { Expected } & \text { Stardard } \
& \text { Returl } & \text { Devation } \
\text { Thumb Devices } & 13 \% & 23 \% \
\text { Air Corrfort } & 10 & 19 \
\text { Sport Garb } & 10 & 17
\end{array}$$
The correlation between Thumb Devices and Air Comfort is ?0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is ?0.85. If you can pick only two stocks for your portfolio, which two stocks should be included in your portfolio to eliminate the most risk? Why?
A) Combine Thumb Devices and Sport Garb because they have a high correlation.
B) Combine Thumb Devices and Air Comfort because of high standard deviations.
C) Combine Air Comfort and Sport Garb due to negative correlation.
D) Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Quizplus · Accepted Answer

Combining Air Comfort and Sport Garb is the best choice to eliminate the most risk because they have a negative correlation of -0.85. This means that their returns move in opposite directions, which helps in diversifying and reducing the overall risk in the portfolio. High negative correlation between stocks is beneficial for risk reduction through diversification.

Consider the Characteristics of the Following Three Stocks The Correlation Between Thumb Devices and Air Comfort Is ?0