If we have a portfolio of multiple stocks with given expected returns and variances, do we...

If we have a portfolio of multiple stocks with given expected returns and variances, do we prefer to hold stocks with higher or lower correlations? Explain your answer for full credit.

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Expert Solution

it is a simply a concept of diversification dont put your all eggs into the same basket to diversify your investment you need to invest in a stock which have lower co-relation among them. suppose due to the problem in certain industry lets say automobile then if we just have stock in that sector then we will have a hige impect of that problem and we have to bear a lots of losses while at other side we also have invested in few different industries than we will have positive return there and our overall portfolio risk will be at lower point, diversification in the portfolio definetly reduces the risk of the investors. what is happening in today's market if we just have hold the stocks of the real estate company or the automobiles companies we have had to bear a huge losses but if we also have purchased some stocks of pharma companies also to have diversification the portfolio so downturn in other industry will covered from the huge gain from the pharma industry due to an impact of the COVID-19.

jeff jeffy answered 1 year ago

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