Use the following three statements to answer this question:
I.When
And we know the return on Security A, we can predict the return on Security B with certainty.
II.Generally, security returns display positive correlations with one another however they are less than one; this is because all securities tend not to follow the movements of the overall market.
III.Any value of correlation less than +1 provides a possibility of diversification.
A)I is incorrect, II is correct, III is correct.
B)I is correct, II is incorrect, III is correct.
C)I and II are incorrect, III is incorrect.
D)I and II are correct, III is incorrect.

Question

Use the following three statements to answer this question:
I.When 
And we know the return on Security A, we can predict the return on Security B with certainty.
II.Generally, security returns display positive correlations with one another however they are less than one; this is because all securities tend not to follow the movements of the overall market.
III.Any value of correlation less than +1 provides a possibility of diversification.
A)I is incorrect, II is correct, III is correct. 
B)I is correct, II is incorrect, III is correct. 
C)I and II are incorrect, III is incorrect. 
D)I and II are correct, III is incorrect.

Quizplus · Accepted Answer

Statement I is correct because if we know the return on one security and its correlation with another security, we can predict the return on the other security. Statement II is incorrect because positive correlations between securities can be greater than one or less than one, and some securities do follow overall market movements. Statement III is correct because any correlation less than +1 indicates that there is some diversification benefit by holding multiple securities in a portfolio.

Use the Following Three Statements to Answer This Question