Asked by Esther Sagoe on Jun 28, 2024
Verified
The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is
A) 0.0.
B) 1.0.
C) 0.5.
D) −1.0.
E) any negative number.
Global Minimum Variance Portfolio
An investment portfolio that is designed to have the lowest risk (variance) for a given rate of return, by optimizing the allocation of assets.
Correlation Coefficient
A statistic in which the covariance is scaled to a value between −1 (perfect negative correlation) and +1 (perfect positive correlation).
- Become familiar with the concept of correlation and its critical importance for diversifying portfolios.
Verified Answer
AP
Allison PersaudJul 02, 2024
Final Answer :
D
Explanation :
The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is -1.0. This is because a perfect negative correlation (-1.0) between the two securities means that their returns move exactly in opposite directions, allowing for the elimination of risk through diversification.
Learning Objectives
- Become familiar with the concept of correlation and its critical importance for diversifying portfolios.
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