Diversification is considered important in finance because it allows investors to reduce risk by investing in a

Question:

Diversification is considered important in finance because it allows investors to reduce risk by investing in a variety of assets. It is especially effective when the correlation between the assets is low. Consider the accompanying table, which shows a portion of monthly data on closing stock prices of four companies in 2010.

a. Compute the correlation coefficients between all pairs of stock prices.
b. Suppose an investor already has a stake in Microsoft and would like to add another asset to her portfolio. Which of the remaining three assets will give her the maximum benefit of diversification?
c. Suppose an investor does not own any of the above four stocks. Pick two stocks so that she gets the maximum benefit of diversification.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...