# Question: One basic theory of investing is diversi cation The idea is

One basic theory of investing is diversiﬁcation. The idea is that you want to have a basket of stocks that do not all “move in the same direction.” In other words, if one investment goes down, you don't want a second investment in your portfolio that is also likely to go down. One hallmark of a good portfolio is a low correlation between investments. The following data represent the annual rates of return for various stocks. If you only wish to invest in two stocks, which two would you select if your goal is to have low correlation between the two investments? Which two would you select if your goal is to have one stock go up when the other goes down?

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