Author Question: Which of the following securities could NOT have any benefits for diversification with your ... (Read 38 times)

karen · **on:** Jul 10, 2018

Which of the following securities could NOT have any benefits for diversification with your investment portfolio?

A) Treasury bills with a correlation coefficient of 0.0 with your portfolio
B) Alpha Company stock that has a correlation coefficient of -0.25 with your portfolio
C) Beta Company stock that has a correlation coefficient of 0.50 with your portfolio
D) All of these choices would reduce risk for your portfolio and therefore show at least some benefit to diversification.

Question 2

You wish to diversify your single-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 -0.25 with your current security
C) Beta Company stock that has a correlation coefficient of 0.50 with your current security
D) Delta Company bonds that have a correlation coefficient of 0.36 with your current security

AaaA · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: D

Answer to Question 2

Answer: B
Explanation: B) Negative correlation means that two different asset returns move in different directions over time. Thus one can offset the bad performance of the other.