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An investor holds a portfolio invested entirely in stock LMN, which has a standard deviation of 20%. Assume the investor sells 50% of his LMN holdings and invests the sale proceeds in stock XYZ, which has a 10% standard deviation and a correlation of 1.0 with stock LMN.
A. Has the investor reduced the risk of his portfolio? Explain why or why not.
B. If stock XYZ had a correlation of 0 with stock LMN, would the investor reduce portfolio risk? Explain why or why not.
Intensively
With concentrated and extensive effort or strength; deeply engaged or committed to a task or activity.
Learned Helplessness
A psychological condition in which an individual learns to believe they are powerless to change their situation despite having the ability to do so, often arising from repeated failures.
Experimental Group
In experimental research, the group of subjects that receives the experimental treatment or intervention, used to test hypotheses against a control group.
Control Opportunities
Refers to situations or mechanisms through which an individual can influence the outcomes or environment around them.
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