fun quiz

a better diversification asset should have: A high volatility and low correlation B low volatility and low correlation C low correlation regardless the volatility



A. High vol and negative would be best. You want the asset to move a lot and be uncorrelated/negatively correlated with the portfolio. Bingo!


If we have our current portfolio which has, say a standard deviation of 15%, we want to add a diversifying asset to this portfolio. We have 2 options: Asset 1: standard deviation = 18% and correlation = 0.2 Asset 2: standard deviation = 50% and correlation = 0.2 Which one is the better diversifier?

A As Paraguay rightly pointed it. Think about it from a covariance perspective. Wouldn’t you prefer an asset with a correlation of -1 and a high SD to give a large negative number that reduces your new SD

answer is A this is EOC over

Which SS/book?