Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose returns had a correlation coefficient of:
A) -1.0
B) +1.0
C) 0.0
D) none of the above

Question

Quizplus · Accepted Answer

The maximum diversification benefit is achieved when the correlation coefficient between the returns of two stocks is -1.0, as this implies perfect negative correlation, meaning when one stock's return goes up, the other's goes down, thus minimizing overall portfolio risk.

Maximum Diversification Benefit Can Be Achieved If One Were to Form