Question

In which of the following situations would you get the largest reduction in risk by spreading your investment across two stocks?

a. two shares are perfectly correlated
b. no correlation
c. modest negative correlation
d. perfect negative correlation

Answer 1

d. perfect negative correlation

Step-by-step explanation:

stock in portfolio has inverse relationship, that is if one stock is decreasing and the other stock will be decreased as well.

Therefore, the risk of portfolio can be reduced by investing in this type of stocks.