Which of the Following Statements About Correlation Is Correct

question 31

Multiple Choice

Which of the following statements about correlation is correct?

• A) If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance, which is less than that of the individual stocks.
• B) If a stock has a negative correlation with market, its systematic risk is more than the market risk.
• C) Stocks with no correlation will have minimum diversification benefits.
• D) The weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio.
• E) Risk is reduced when negatively related stocks are combined to form portfolios as long as the correlation coefficient is not equal to -1.

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Definitions:

National Saving

The total amount saved by a country's economy, calculated as the sum of private and public savings, often representing the difference between national income and consumption.

Closed Economy

An economic system that does not interact with other economies in terms of trade, investment, or migration.

Closed Economy

An economic system that does not engage in international trade with outside countries and relies wholly on its own resources.

Loanable Funds

The funds available for borrowing in the financial markets, consisting of savings and sometimes bank loans that are available to be lent to businesses and individuals.