Question: Two important terms when discussing - Select - symmetrydiscountingdiversificationCorrect 8 of Item 1 are correlation and correlation coefficient. Correlation is the tendency of two variables

Two important terms when discussing

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symmetrydiscountingdiversificationCorrect

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of Item

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are correlation and correlation coefficient. Correlation is the tendency of two variables to move together, while correlation coefficient is a measure of the degree of relationship between two variables. If a portfolio consists of two stocks that are perfectly

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positivelynegativelyCorrect

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correlated then the portfolio is riskless because the stocks' returns move countercyclically to each other. If the returns of the stocks are perfectly

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positivelynegativelyCorrect

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of Item

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correlated then the stocks' returns would move up and down together and the portfolio would be exactly as risky as the individual stocks. In this situation, diversification would be completely

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usefuluselessCorrect

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of Item

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for reducing risk.

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