A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification

Options

alternatives available are listed below. Which security would enable the highest level of risk diversification? a. 0.0

b. 0.25

c. - 0.25

d. - 0.75

e. 1.0

Answer:

d. - 0.75

Explanation:

In management of risk, diversification is a tool that combines a wide variety of investments within a portfolio.

The least negative security provides the highest level of risk diversification.

In this case, it's - 0.75

Diversification spreads risks across various investments, the goal being to increase your odds of investment success and thereby, reducing the risk of loss, i. e. when the ROI on one investment is poor over a certain period, the ROI on others may perform better over that same period.