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Correlation is the key in diversification of risk. If one asset does well, the other does not.
Therefore, adding assets that do not behave like other assets in your portfolio is good and can
reduce risk. The two companies should have a correlation of less than 1.0. Even when we expand
the portfolio to many assets, correlation among assets remains the primary determinant of
portfolio risk. Lower correlations are associated with lower risk. Unfortunately, most assets have
high positive correlations. The challenge in diversifying risk is to find assets that have a
correlation that is much lower than +1.0.
For Diversified portfolios investor must have domestic stocks, domestic bonds, foreign stocks,
foreign bonds, real estate, cash, and other asset classes.The low correlations between stocks and
bonds are attractive for portfolio diversification. Similarly, including international securities in a
portfolio can also control portfolio risk
Solution
Correlation is the key in diversification of risk. If one asset does well, the other does not.
Therefore, adding assets that do not behave like other assets in your portfolio is good and can
reduce risk. The two companies should have a correlation of less than 1.0. Even when we expand
the portfolio to many assets, correlation among assets remains the primary determinant of
portfolio risk. Lower correlations are associated with lower risk. Unfortunately, most assets have
high positive correlations. The challenge in diversifying risk is to find assets that have a
correlation that is much lower than +1.0.
For Diversified portfolios investor must have domestic stocks, domestic bonds, foreign stocks,
foreign bonds, real estate, cash, and other asset classes.The low correlations between stocks and
bonds are attractive for portfolio diversification. Similarly, including international securities in a
portfolio can also control portfolio risk

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Correlation is the key in diversification of risk. If one asset does.pdf

  • 1. Correlation is the key in diversification of risk. If one asset does well, the other does not. Therefore, adding assets that do not behave like other assets in your portfolio is good and can reduce risk. The two companies should have a correlation of less than 1.0. Even when we expand the portfolio to many assets, correlation among assets remains the primary determinant of portfolio risk. Lower correlations are associated with lower risk. Unfortunately, most assets have high positive correlations. The challenge in diversifying risk is to find assets that have a correlation that is much lower than +1.0. For Diversified portfolios investor must have domestic stocks, domestic bonds, foreign stocks, foreign bonds, real estate, cash, and other asset classes.The low correlations between stocks and bonds are attractive for portfolio diversification. Similarly, including international securities in a portfolio can also control portfolio risk Solution Correlation is the key in diversification of risk. If one asset does well, the other does not. Therefore, adding assets that do not behave like other assets in your portfolio is good and can reduce risk. The two companies should have a correlation of less than 1.0. Even when we expand the portfolio to many assets, correlation among assets remains the primary determinant of portfolio risk. Lower correlations are associated with lower risk. Unfortunately, most assets have high positive correlations. The challenge in diversifying risk is to find assets that have a correlation that is much lower than +1.0. For Diversified portfolios investor must have domestic stocks, domestic bonds, foreign stocks, foreign bonds, real estate, cash, and other asset classes.The low correlations between stocks and bonds are attractive for portfolio diversification. Similarly, including international securities in a portfolio can also control portfolio risk