For purposes of maximum portfolio diversification, which of the following would

Question

For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?

A. Security A with a correlation coefficient of -0.0

B. Security B with a correlation coefficient of 0.0

C. Security C with a correlation coefficient of -0.50

D. Security D with a correlation coefficient of 0.50

A. Security A with a correlation coefficient of -0.0

B. Security B with a correlation coefficient of 0.0

C. Security C with a correlation coefficient of -0.50

D. Security D with a correlation coefficient of 0.50

Explanation / Answer

Based on the above we can conclude that correct answer is C

C. Security C with a correlation coefficient of -0.50

The above security will involve stocks such that when price of one goes up another will come down and vice versa. Hence this is the widely diversified portfolio.

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