Explain the relationship between correlation, diversification, and risk reduction
What will be an ideal response?
Answer: Correlation is a statistic that measures the relationship between returns on assets. Positively correlated assets move together; negatively correlated opposites move in opposite directions. Diversification reduces risk most effectively when the assets have low or negative coefficients of correlation.
You might also like to view...
Which of the following research and development related costs should be capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future b. Inventory used for a specific research project c. Administrative salaries allocated to research and development d. Research findings purchased from another company to aid a particular research project currently in process
When Darrell purchased a five-kg bag of 9 Lives cat food, he received a free can of the manufacturer's new gourmet cat food. What is the can of cat food an example of?
a. product placement b. a premium c. a loyalty incentive d. a trade sample