Secret Sauce Q

on pg 181 it says “the higher the average correlation the fewer stocks it takes to achieve the specified amount of risk reduction” is that factually accurate? That’s counter intuitive if it is correct.

its correct. the higher the correlation, the less possible diversification benefits, so it wont take many stocks to get there. lower correlation = more diversification opportunities but it also = greater number of stocks needed to achieve it

It is accurate. There is not as much diversification benefit if there is high correlation. Whereas when there is negative correlation there is a much larger benefit so it takes more stocks.

wow thats freaky

that makes absolutely no sense. but thanks for the quick response guys. I will commit this to memory.

i just feel like no matter how much you study, there’s always a little thing like this that throw me off.