The correlation between the return on the risk-free asset and the return on a risky asset is always:
A)-1
B)0
C)1
D)0.5

Question

Quizplus · Accepted Answer

There is no necessary correlation between the return on the risk-free asset and the return on a risky asset. The return on the risky asset will depend on the specific risk and return characteristics of that asset, while the return on the risk-free asset is theoretically known and fixed. Therefore, the correlation between the two may be positive, negative, or zero, depending on the specific assets being compared. However, in general, the return on the risk-free asset is considered a benchmark for the return on risky assets, and may be used in the calculation of the risk premium.

The Correlation Between the Return on the Risk-Free Asset and the Return