Q1B

Expert-verifiedFound in: Page 183

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**In forming a portfolio of two risky assets, what must be true of the correlation coefficient between their returns if there are to be gains from diversification? Explain.**

Should not be zero or 1.0.

The specific measure that quantifies the strength of the linear relationship between two variables in a correlation analysis is known as correlation coefficient.

The portfolio will contain diversification benefits if the correlation coefficient is positive and less than 1.0. For any other combination, the standard deviation will fall relative to the return on the portfolio.

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