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Correlation & Diversification
1. What is the typical range of the Pearson correlation coefficient?
-1 to 1
0 to 1
-∞ to ∞
1 to 10
2. Which of the following correlation values between assets would provide the greatest diversification benefit?
-0.8
0
0.5
0.9
3. Diversification can eliminate all investment risk.
True
False
4. What term describes the reduction of portfolio risk through combining assets with different return patterns?
5. Which correlation value indicates a perfect positive linear relationship between two assets?
1
-1
0
0.5
6. Which of the following are benefits of diversification?
Reduces unsystematic risk
Increases expected return
Reduces total risk (when assets are not perfectly correlated)
Eliminates systematic risk
7. A correlation of 0 between two assets means they have no relationship.
True
False
8. The measure of how two assets' returns move relative to each other is called...
9. In a portfolio with two assets, if their correlation is -1, what is the effect on portfolio variance?
It can be reduced to zero
It increases
It remains the same
It depends on asset weights
10. Which of the following statements about correlation are true?
Correlation does not imply causation
Correlation ranges from -1 to 1
A correlation of 0.5 is considered a strong positive correlation
Correlation measures the slope of the regression line
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