Can someone please clarify this sentence? i dont quite understand it. “As the correlation between securities increases, the number of securities required to achieve a particular level of portfolio risk decreases” How is the correlation between securities and the number of securities required to achieve a particular level of portfolio risk related?
bump
According to my understanding
correlation among security returns defines the level of diversification one can achieve in a portfolio. perfectly positivity corelated securities give no diversification benefit. and as corelation moves towards -1 diversification benefit increases.
this may not be correct, it is just what I understood from my undergrad course!
They’re saying a particular level of risk, not a minimum level of risk. basically if more stocks have similar correlation,its easier to get to a common level risk with those stocks, than a lot more stocks that are less correlated
That makes sense.
That’s a weirdly phrased sentence.
More securities means more diversification. Less correlation between securities means more correlation.
haha, k, thanks… i get it… BTW, the exact number can be calculated using the sigma-correlation formula.
In that sentence “portfolio risk” does not refer to the “benefits of diversification.”