Correlations and Portfolio Risk An investor is holding a portfolio and is consid
ID: 2791569 • Letter: C
Question
Correlations and Portfolio Risk An investor is holding a portfolio and is considering adding either Stock A, Stock B or Stock C to her portfolio. With respect to her portfolio, Stock A has a correlation coefficient of 0.41, Stock B has a correlation coefficient of 0.49 and Stock C has a correlation coefficient of 0.83. If all three stocks have the same expected return she should choose ____________ to give the best chance of improving her excess return per unit of risk.
Correlations and Portfolio Risk An investor is holding a portfolio and is considering adding either Stock A, Stock B or Stock C to her portfolio. With respect to her portfolio, Stock A has a correlation coefficient of 0.41, Stock B has a correlation coefficient of 0.49 and Stock C has a correlation coefficient of 0.83. If all three stocks have the same expected return she should choose ____________ to give the best chance of improving her excess return per unit of risk.
Explanation / Answer
She should select Stock A as it has the lowest correlation coefficient with the portfolio which will help in reducing the risk of the portfolio and hence, improve return per unit of risk.