Suppose that a share portfolio and a bond portfolio have a zero correlation. This means that ________.
A)the returns on the share and bond portfolio tend to move inversely
B)the returns on the share and bond portfolio tend to vary independently of each other
C)the returns on the share and bond portfolio tend to move together
D)the covariance of the share and bond portfolio will be positive

Question

Quizplus · Accepted Answer

A zero correlation means that the returns on the share and bond portfolios do not have a linear relationship with each other. Therefore, they tend to vary independently of each other. Option A is incorrect because a zero correlation does not necessarily mean that the returns move inversely. Option C is incorrect because a zero correlation explicitly means that the returns do not move together. Option D is incorrect because a positive covariance implies a positive relationship between the returns of both portfolios, which contradicts the zero correlation assumption.

Suppose That a Share Portfolio and a Bond Portfolio Have