Portfolio Management Q58

58Assume that two securities that are present in equal proportions in an investor’s portfolio have the same expected returns and volatility. For which of the following correlations between the two securities would the investor most likely be able to achieve the greatest diversification benefit?

Option : B
Explanation : Diversification benefit is greatest when a portfolio consists of securities that do not move together and thus the investor should invest in securities with the lowest correlation i.e. – 0.86.

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