Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:

-Which of the following combinations of two stocks would give you the biggest reduction in risk?
A) Duke Energy and Wal-Mart
B) Wal-Mart and Microsoft
C) Microsoft and Duke Energy
D) No combination will reduce risk.

Question

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
 
-Which of the following combinations of two stocks would give you the biggest reduction in risk?
A) Duke Energy and Wal-Mart 
B) Wal-Mart and Microsoft 
C) Microsoft and Duke Energy 
D) No combination will reduce risk.

Quizplus · Accepted Answer

To determine the biggest reduction in risk, we need to look for the combination that has the highest negative correlation. From the table, we can see that the correlation between Microsoft and Duke Energy is -0.5, which is the lowest correlation among all the pairs. Therefore, choosing Microsoft and Duke Energy would provide the biggest reduction in risk.

Use the Table for the Question(s) Below