Consider the characteristics of the following three stocks: 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 would you pick? 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 and Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Question

Consider the characteristics of the following three stocks:  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 would you pick? 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 and Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Quizplus · Accepted Answer

The negative correlation (-0.85) between Air Comfort and Sport Garb indicates that they have the potential to diversify each other in a portfolio, decreasing overall risk. Additionally, the correlation between Thumb Devices and Air Comfort (-0.12) is not strong enough to justify choosing those two stocks over the negatively correlated Air Comfort and Sport Garb. The standard deviations are not mentioned, so they are not a factor in this decision. The returns of the stocks are also not mentioned, so they do not provide any relevant information for this particular question.

Consider the Characteristics of the Following Three Stocks: the Correlation