Question

Portfolio X and Portfolio Z have identical levels of total risk and similar weighting schemes. The correlations among the securities in X are much lower than those in Z. Which statement is most accurate?

a) Portfolio X has a lower standard deviation.
b) Portfolio X has a higher variance.
c) Portfolio Z has greater diversification.
d) Portfolio Z has much lower expected return.

Answer 1

Portfolio Z has greater diversification.

Step-by-step explanation:

The correct answer is c) Portfolio Z has greater diversification.

When the correlations among the securities in Portfolio X are lower than those in Portfolio Z, it indicates that the securities in Portfolio X are less dependent on each other compared to the securities in Portfolio Z. This means that Portfolio Z has a higher level of diversification, which helps reduce its overall risk.