True or False ? “A stock with returns that have little correlation with Market portfolio returns is relatively more valuable and will have relatively high returns” -(False) Little correlation points to lower covariance and hence both might move in different directions and will cancel each other effects hence more diversification and hence lesser risk , but since portfolio deviation would also decrease and hence lower returns. Any suggestions ? Regards, Gaurav
Well, I’ve not yet gotten to the portfolio management book, but I do work with this kind of stuff a bit… and to my mind the statement is true up until the point where it says “have relatively higher returns” which is not neccessarily the case, but it could be. I suppose you could also quibble with the assertion that it is “relatively more valuable” as well. Relative to what? Other securities in your portfolio? More valuable than its market price? Inherently more valuable simply because it is not correlated with the market? But if this is the case wouldn’t the market have factored that into the price? Now that I’ve said that, it seems false on several levels.
The word little is making this unclear for me… If it’s little does that mean… closer to 0… if it is… then more valueable is wrong! then other is trivial… as you can have high returns if your stock is negatively correlated with the market or positively correlated or have zero correlation.