When plotting the risk/return relationships for possible portfolios of two securities, the lowest standard deviation of the portfolio possibilities would occur if the correlation coefficient were
A) 0.
B) -1.
C) .5.
D) 1.

Question

Quizplus · Accepted Answer

A correlation coefficient of -1 represents perfect negative correlation between the two securities, meaning that when one security goes up, the other goes down. This creates a diversification effect that can help reduce volatility and potential losses, resulting in the lowest standard deviation of the portfolio possibilities.

When Plotting the Risk/return Relationships for Possible Portfolios of Two