What is the possible range for a correlation coefficient? For purposes

What is the possible range for a correlation coefficient? For purposes of diversification, what type of correlation coefficient among asset returns is preferred by investors? Explain why.

What will be an ideal response?

ANSWER

Answer: The range for a correlation coefficient is from a perfectly negative correlation of -1.0 to a perfectly positive correlation of +1.0. For diversification purposes, the lower the correlation coefficient, the greater the risk reduction and therefore, the greater the preference by investors for adding securities that have low to negative correlation coefficients with their existing portfolios. Keep in mind that most publicly traded stocks have positive correlation coefficients with one another.