Combining two stocks to form a portfolio offers maximum diversification benefits when _____.
A)the stocks have a correlation coefficient equal to 0
B)the stocks have a correlation coefficient equal to +1
C)the stocks have a correlation coefficient equal to -1
D)the both stocks have a coefficients of variation of 0
E)both stocks have a coefficients of variation of -1

Question

Combining two stocks to form a portfolio offers maximum diversification benefits when _____. 
A)the stocks have a correlation coefficient equal to 0
B)the stocks have a correlation coefficient equal to +1
C)the stocks have a correlation coefficient equal to -1
D)the both stocks have a coefficients of variation of 0
E)both stocks have a coefficients of variation of -1

Quizplus · Accepted Answer

Maximum diversification benefits are achieved when the stocks in a portfolio have a correlation coefficient of -1, as this indicates that the stocks move in exactly opposite directions, thereby reducing the portfolio's overall risk.

Combining Two Stocks to Form a Portfolio Offers Maximum Diversification