Question

136. Given only the following information below, which of the following investments would likely be best...

136. Given only the following information below, which of the following investments would likely be best to add to a portfolio if the primary goal in adding another asset is to reduce risk?

• investment “A” with correlation of -0.25 and standard deviation of 17%

• investment “B” with correlation of +0.35 and standard deviation of 15%

• investment “C” with correlation of -0.50 and standard deviation of 19%

• investment “D” with correlation of +0.75 and standard deviation of 13%

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Answer #1

Answer:

Correct answer is:

• investment “C” with correlation of -0.50 and standard deviation of 19%

Explanation:

The variance of portfolio =

Based on this formula, reduction in portfolio variation will be higher if coefficient of correlation is negative. Further the reduction on portfolio variation will be higher with addition of investment “C” with correlation of -0.50 and standard deviation of 19% compared to addition of investment “A” with correlation of -0.25 and standard deviation of 17%.

As such option C is correct and other options A, B and D are incorrect.

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