For a Two-Stock Portfolio, the Maximum Reduction in Risk Occurs

question 69

Multiple Choice

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks is:

• A) +1
• B) -0.5
• C) -1
• D) 0

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Definitions:

Production Possibility Frontier

A curve depicting all maximum output possibilities for two or more goods given a set of inputs, assuming full and efficient utilization of resources.

Opportunity Cost

The exclusion of favorable outcomes from different choices upon selecting one option.

Increasing Opportunity Cost

A scenario where choosing more of one option increasingly limits the ability to choose other options, demonstrating the trade-offs in resource allocation.

Straight Line

A direct path between two points in a plane or three-dimensional space, having no curvature.