Question

Which of the following statements is not true? a) Correlation, not covariance, allows us to accurately measure the degree to which stock returns tend to move together in the same or opposite directions b) Regardless of the weights assigned to individual stocks in a two stock portfolio, the lower the correlation of the stocks’ returns, the lower the volatility of the portfolio returns. c) For some investors, 100% investment in a single stock can be an efficient choice from the set of all possible two-stock portfolios. d) No single portfolio on the efficient set of all possible two-stock portfolios will be chosen by all investors.

Answer 1

a) Correlation, not covariance, allows us to accurately measure the degree to which stock returns tend to move together in the same or opposite directions

This statement is not true. Both covariance and correlation allows to measure the degree and direction to which stock returns tend to move. Correlation is a standardized number between -1 and +1 whereas covariance can be any number.

b) is true as lower the correlation, lower is the volatility of the portfolio. c) is also true since a single stock can be an efficient choice for an investor. d) is true because not all investors have the same risk-return profile.