Which of the following statements is FALSE?
A) The covariance and correlation allow us to measure the co-movement of returns.
B) Correlation is the expected product of the deviations of two returns.
C) Because the stocks' prices do not move identically, some of the risk is averaged out in a portfolio.
D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

Question

Quizplus · Accepted Answer

Correlation is the measure of the linear relationship between two variables and is a standardized version of covariance. The formula for correlation involves dividing the covariance by the product of the standard deviations of the two variables. It is not the expected product of the deviations of two returns.

Which of the Following Statements Is FALSE