You wish to diversify your single minus −security portfolio in a way that will maximize your...
You wish to diversify your single minus −security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio?
A. Treasury bills that have a correlation coefficient of 0.0 with your current security
B. Alpha Company stock that has a correlation coefficient of minus −0.25 with your current security Your answer is correct.
C. Delta Company bonds that have a correlation coefficient of 0.36 with your current security
D. Beta Company stock that has a correlation coefficient of 0.50 with your current security
Why did we pick B?
Homework Answers
Please find below the solution……..let me know if you need any clarification.
Correct answer is option : B) Alpha Company stock that has a correlation coefficient of minus −0.25 with your current security
One can diversify the portfolio by addting the stock in the exising potfolio which has negative correclation. Correction indicate that the two stock more in positive or negative direction. Therefore if negatively correlated stock added to the portfolio it will reduce the risk.
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