Investors should select stocks with a correlation of to maximise diversification in a two-asset portfolio.a.1b.-1c.0d.0.5

Break Down the Problem

1. Identify the purpose of correlating stocks in an investment portfolio.
2. Understanding correlation values and their impact on diversification.

Relevant Concepts

1. Correlation values range from -1 to 1.
   • -1 indicates perfect negative correlation (when one asset goes up, the other goes down).
   • 0 indicates no correlation (the performance of one asset does not affect the other).
   • 1 indicates perfect positive correlation (both assets move in the same direction).
2. For maximizing diversification, investors should ideally have assets that do not move in tandem.

Analysis and Detail

1. Examining the options:
   • Option a (1): Perfect positive correlation means both assets move together, which does not enhance diversification.
   • Option b (-1): Perfect negative correlation is ideal for diversification, as the two assets offset each other's movements.
   • Option c (0): No correlation offers some level of diversification but may not maximize it as effectively as a negative correlation.
   • Option d (0.5): Moderate positive correlation does not provide effective diversification as the assets may still move together.

Verify and Summarize

• Upon analysis, the best option for maximizing diversification in a two-asset portfolio would be to choose assets that have a correlation of -1. This reflects the highest level of diversification by ensuring that gains in one asset will offset losses in another.

Final Answer

b. -1