Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks...
Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose returns had a correlation coefficient of:
A. -1.0
B. +1.0
C. 0.0
D. none of the above
Homework Answers
Answer: A. -1.0
Maximum diversification benefit in a portfolio is achieved when the two stocks in portfolio have minimal correlation between their returns. The lowest correlation possible is -1, and hence that is the point where there could be maximum diversification benefit.
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