Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?
A) market risk
B) nondiversifiable risk
C) systematic risk
D) unique risk

Question

Quizplus · Accepted Answer

Investing in two assets with a correlation coefficient of -.5 will reduce unique risk, also known as firm-specific risk or idiosyncratic risk. However, it will not reduce market risk or systematic risk, which are inherent to the overall market and cannot be diversified away through asset selection. Nondiversifiable risk is another term for systematic risk, so it also will not be reduced.

Investing in Two Assets with a Correlation Coefficient of -