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Correlation and Portfolio Diversification

 

Perfect Positive Correlation

  • ρ =1 & Var (wAkA+ wBkB)= (wAσA + wBσB)2

 

Perfect Negative Correlation

  • ρ =-1 & Var (wAkA + wBkB) = (wAσA - wBσB)2

 

Zero Correlation

  • Correlation between two assets is zero

 

Moderate Positive Correlation

  • Correlation between two assets lies between 0 and 1





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