In a two-asset portfolio,Stock A and Stock B have a measured correlationship of r = -.80.Which of the following best describes the impact on the portfolio of having "A" and "B" in the portfolio?
A)A and B are perfectly positively correlated, which reduces diversification.
B)A and B are negatively correlated, which improves diversification in the portfolio.
C)A and B are negatively correlated, which reduces diversification in the portfolio.
D)A and B are perfectly negatively correlated, which reduces diversification.

Question

Quizplus · Accepted Answer

A negative correlation between the assets (r = -.80) implies that when the price of one asset declines, the price of the other asset tends to increase. This helps to mitigate the risk of holding only one asset in the portfolio. Therefore, the negative correlation between A and B improves diversification.

In a Two-Asset Portfolio,Stock a and Stock B Have a Measured