Lecture 5

Question 1

Diversification

Answer 1

The process of investing money in a range of different securities and assets with the aim of reducing risk. When assets are not perfectly positively correlated, the total risk can be reduced.

Question 2

Risk Correlation

Answer 2

+1 = perfectly positive correlation which is where if one asset rises by 1% the other asset also rises by 1%
-1 = perfectly negative correlation which is where if one asset rises by 1% the other will fall by 1%