Question

Which of the following securities could NOT have any benefits for diversification with your investment​ portfolio?

A. Alpha Company stock that has a correlation coefficient of −0.25 with your portfolio

B. Beta Company stock that has a correlation coefficient of 0.50 with your portfolio

C. Treasury bills with a correlation coefficient of 0.0 with your portfolio

D. All of these choices would reduce risk for your portfolio and therefore show at least some benefit to diversification.

Please explain WHY

Answer 1

The correct answer is option D

D. All of these choices would reduce risk for your portfolio and therefore show at least some benefit to diversification.

As long as the assest that we add to our portfolio is not perfectly correlated (correlation coefficient = + 1), the risk is reduced and we get diversification benefits.

Options A, B, and C are incorrect because the correlaiton coefficeint is less than 1 for each of the assets and hence we get diversification benefits.