if the correlation between the two assets decreases, what should happen to the standard deviation of portfolio returns?

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19-12-2022
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if the correlation between the two assets decreases, what should happen to the standard deviation of portfolio returns?

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AnushkaSh AnushkaSh · Answer 1 · 2022-12-22T12:55:01+01:00

The portfolio's standard deviation is decreased by securities with imperfectly positive correlation.

How does the correlation between the assets in the portfolio affect the standard deviation of the portfolio?

The SD of the portfolio will decrease if stocks that are not absolutely positively correlated with one another are included. The benefits of diversity are higher and the portfolio risk is lower when there are reduced correlations between the returns of the assets in the portfolio.

How does a portfolio's decision-making process depend on the correlation coefficient?

The degree of correlation between the price changes of the various assets included in diversified portfolios is represented by correlation. When prices move in tandem, they have a correlation of +1.0; when they move in opposition, they have a correlation of -1.0.

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