For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?
A) +1.00
B) +0.50
C) 0.00
D) −1.00
E) None of the options are correct.

Question

Quizplus · Accepted Answer

A correlation coefficient of -1.00 between two stocks in a portfolio is preferred for diversification purposes because it means the stocks move in exactly opposite directions, reducing the portfolio's overall risk.

For a Two-Stock Portfolio, What Would Be the Preferred Correlation