Answer (D) is correct . The correlation coefficient measures the degree to which any two variables, e.g., two stocks in a portfolio, are related. Perfect negative correlation (–1.0) means that the two variables always move in the opposite direction. Given perfect negative correlation, risk would in theory be eliminated. In practice, the existence of market risk makes perfect correlation all but impossible.
Answer (A) is incorrect because The range of the coefficient of correlation is 1.0 to –1.0.
Answer (B) is incorrect because A coefficient of correlation of 1.0 indicates perfect positive correlation. Given perfect positive correlation, risk for a two-stock portfolio with equal investments in each stock would be the same as that for the individual assets.
Answer (C) is incorrect because A coefficient of correlation of 0.0 indicates no correlation at all.
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