When a new stock is introduced into a portfolio and the "peaks" in its return occur with the "valleys" in the portfolio's return, the stock's return is said to be perfectly negatively correlated with the portfolio's, and its addition will reduce the portfolio's risk.

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Quizplus · Accepted Answer

This statement correctly describes the concept of negative correlation between individual stock returns and portfolio returns. When a stock's returns move in the opposite direction of the overall portfolio's returns (i.e. "peaks" occur when the portfolio experiences "valleys"), it is considered to have negative correlation. Adding such a stock to a portfolio can reduce the portfolio's overall risk, as it provides diversification benefits by moving independently of the other portfolio holdings.

When a New Stock Is Introduced into a Portfolio and the "Peaks