An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are
A) Not correlated with the existing exposure.
B) Positively correlated with the existing exposure.
C) Negatively correlated with the existing exposure.
D) Any of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

By entering into a hedge position that is negatively correlated with the existing exposure, the portfolio manager can neutralize the risk of falling stock prices. This means that if the stocks in the portfolio decrease in value, the hedge position will increase in value, offsetting some or all of the losses in the equity portfolio. Therefore, answer choice C is the best choice.

An Equity Portfolio Manager Can Neutralize the Risk of Falling