Economics & AnalysisQuestion 6 of 110
Two assets have a correlation coefficient of -1.0. What is the diversification implication?
a.The assets move perfectly together, offering no diversification benefit
b.The assets are unrelated and provide moderate diversification
c.The assets move exactly opposite, offering maximum diversification benefit
d.Correlation cannot fall below zero for real assets
Explanation
A correlation of -1.0 means two assets move in exactly opposite directions, which allows losses in one to be offset by gains in the other and provides the greatest diversification benefit. A correlation of +1.0 offers no diversification. Correlation ranges from -1.0 to +1.0, so negative values are possible.
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