Correlation Coefficient and Variance
Which one of the following statements about correlation is NOT correct?
Potential benefits from diversification arise when correlation is less than +1.
If the correlation coefficient were -1, a zero variance portfolio could be constructed.
If the correlation coefficient were 0, a zero variance portfolio could be constructed.
I had to think this one through, is this logic correct? Since the formula for Variance is
and we want 0 variance, that would mean we need the third term 2w1*w2*Corr1,2*stdev1*stdev2 to equal negative some number. That way we can add the other two positive terms to maybe come up with zero variance?
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