Question

Consider two perfectly negatively correlated risky securities a and b?
1) True
2) False

Answer 1

The statement is true. Perfectly negatively correlated securities have returns that move in opposite directions, which can be useful for diversification and reducing overall risk in an investment portfolio.

Step-by-step explanation:

The statement is true. When two securities are perfectly negatively correlated, it means that their returns move in opposite directions. For example, if security A's return increases, security B's return decreases by the same amount.

This negative correlation can be useful for diversification in an investment portfolio. When one security is performing poorly, the other may be performing well, helping to reduce overall risk.

When analyzing the relationship between two securities, it is important to consider their correlation coefficient. A correlation coefficient of -1 indicates perfect negative correlation.