In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk?
A) Stocks with returns that are positively correlated
B) Stocks with returns that are negatively correlated
C) Stocks with returns that are not correlated
D)Stocks that have the highest expected returns

Question

Quizplus · Accepted Answer

Stocks with returns that are negatively correlated tend to move in opposite directions, which means when one stock's value goes down, the other stock's value goes up. Combining stocks with negative correlation in a portfolio helps to diversify the portfolio and reduce overall risk. This is because when one stock in the portfolio is experiencing losses, the other stocks may be performing well, which offsets the losses and reduces the overall portfolio risk.

In General, Which Stocks Should Be Combined into a Portfolio