For purposes of maximum portfolio diversification,which of the following would provide the greatest diversification?
A)Security A with a correlation coefficient of -0.0
B)Security B with a correlation coefficient of 0.0
C)Security C with a correlation coefficient of -0.50
D)Security D with a correlation coefficient of 0.50

Question

Quizplus · Accepted Answer

The greatest diversification would be achieved by investing in securities with lower or negative correlation coefficients. Security C which has a correlation coefficient of -0.50 is the best choice as it has a negative correlation with the other securities, indicating that it is less likely to move in the same direction as the other securities when market conditions change. Security A with a correlation coefficient of -0.0 and Security B with a correlation coefficient of 0.0 could provide some diversification, but they are not as effective as Security C. Security D with a correlation coefficient of 0.5 is not a good choice for diversification as it positively correlates with the other securities, meaning it is more likely to move in the same direction as the other securities.

For Purposes of Maximum Portfolio Diversification,which of the Following Would