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 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 Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

Quizplus · Accepted Answer

Negative correlation is beneficial for portfolio diversification because it reduces the overall risk of the portfolio. Therefore, it is best to combine Air Comfort and Sport Garb because they have a negative correlation of -0.85. Combining Thumb Devices and either Air Comfort or Sport Garb would not provide the same diversification benefits as their correlations are both positive. Additionally, the given information does not provide enough data to compare the standard deviations or returns of each stock.

Consider the Characteristics of the Following Three Stocks