The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.
-Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of common stock?
A) Stock A
B) Stock B
C) There is no difference between A or B
D) You cannot tell from the information given.

Question

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. 
-Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of common stock?
A) Stock A 
B) Stock B 
C) There is no difference between A or B 
D) You cannot tell from the information given.

Quizplus · Accepted Answer

Based on the plot, Stock B appears to have a negative correlation with the market index, meaning it moves in the opposite direction of the market. This can potentially further reduce the risk in a well-diversified portfolio, as it provides some protection when the market is experiencing a downturn. In contrast, Stock A appears to have a positive correlation with the market index, meaning it moves in the same direction as the market, which may not provide as much risk reduction in a well-diversified portfolio.

The Figures Below Show Plots of Monthly Excess Returns for Two