How Does Restricting the Range of a Variable Affect the Correlation

question 42

Multiple Choice

How does restricting the range of a variable affect the correlation coefficient?

• A)It improves the correlation coefficient.
• B)It reduces the magnitude of the correlation coefficient.
• C)It has no effect on the correlation coefficient.
• D)It changes the direction of the correlation coefficient.

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Definitions:

Beta

A measure of the volatility, or systematic risk, of a security or a portfolio compared to the market as a whole.

Systematic Risk

Systematic risk refers to the overall risk affecting the entire market or market segment, making it unavoidable through diversification.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio.

Idiosyncratic Risk

The risk associated with an individual asset, which can be mitigated through diversification.