Explain the Importance of the Correlation Coefficient for Diversification

question 48

Essay

Explain the importance of the correlation coefficient for diversification.

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Definitions:

Cash

Money in the form of bills or coins; represents the most liquid form of assets available.

Building

A structure with walls and a roof, such as a house or factory, designed for various uses.

Investment

Allocation of resources, such as capital or time, in the expectation of generating an income or profit.

Line-By-Line Method

The line-by-line method is a technique used in consolidating the financial statements of a parent company and its subsidiaries, where each item of the subsidiary is added line by line to those of the parent.