You wish to diversify your single-security portfolio in a way that wil

You wish to diversify your single-security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio?

A) Treasury bills that have a correlation coefficient of 0.0 with your current security
B) Alpha Company stock that has a correlation coefficient of -0.25 with your current security
C) Beta Company stock that has a correlation coefficient of 0.50 with your current security
D) Delta Company bonds that have a correlation coefficient of 0.36 with your current security

ANSWER

Answer: B
Explanation: B) Negative correlation means that two different asset returns move in different directions over time. Thus one can offset the bad performance of the other.