The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.
A) −1.0
B) −0.5
C) 0
D) 0.5
E) 1.0

Question

Quizplus · Accepted Answer

The correlation coefficient ranges from -1 to +1, with -1 indicating a perfect negative correlation and +1 indicating a perfect positive correlation. When two assets have a correlation coefficient of -1, they move in opposite directions, i.e., when one asset goes up, the other goes down. Therefore, combining two assets with a correlation coefficient of -1 would create a perfectly hedged portfolio that eliminates all risk.

The Biggest Reduction in Risk Would Be Achieved by Combining