If the Correlation Between Two Stocks Is +1, Then a Portfolio

question 60

Multiple Choice

If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is:

• A) less than the weighted average of the two individual variances.
• B) greater than the weighted average of the two individual variances.
• C) equal to the weighted average of the two individual variances.
• D) less than or equal to average variance of the two weighted variances, depending on other information.

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Definitions:

Option Smirk

A pattern on the implied volatility graph for options across different strike prices that shows asymmetric volatility, often indicating market anticipation of movement.

Black-Scholes Option

A mathematical model used to price European options and derivatives by estimating the variation over time of financial instruments.

Implied Volatility

The market's forecast of a likely movement in a security's price, often derived from the price of its options.

Binomial Option Model

A mathematical model used to price options by breaking down the option's life into discrete time intervals and calculating the value at each step.