CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

If you desire maximum diversification, you should search for stocks with a correlation coefficient equal to ______.

A. +1.0
B. 0.0
C. -1.0
Correct Answer: C

User Contributed Comments 10

User Comment
piesiu Why not B.
roark if correlation coefficient is zero, portfolio risk (SD)is more than zero
soarer1 Maximum diversification = -1
magicchip not B because then you would not be engaged in diversification. diversify = add securities which tend to move in the opposite direction of your portfolio to hedge your market risk.
alai2008 with a 0 correlation returns are independent. with a correlation of -1 movements are in the opposit direction, so they offset one each other that is the main benefit of diversification.
zeiad very goos thanks alai2008.
DonAnd The ultimate benefit of diversification occurs when the correlation between 2 assets is -1 (when they are perfectly -vely correlated)
sarathbs @Magicchip. I think it's asset risk we are hedging with -ve correlation not market.
thekobe you have to focus on the std dev for a portfolio, and more specific on the covariances
Rachelle3 to add to what alai2008 said the closer the number is to equalling 1 the more positively correlated they are 0.9898 is almost a perfect straight line.
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