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Essentials Of Investments
Found in: Page 183
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

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.

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Step by Step Solution

Step 1: Definition

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

Step 2: Explanation on the correlation coefficient between returns

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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