Consider a portfolio composed of Asset A with an expected return of 8% and standard deviation of 15%, and Asset B with an expected return of 5% and standard deviation of 8%. If the correlation coefficient between Asset A and Asset B is -0.3, what is the primary benefit of combining these assets into a portfolio?

Question: Consider a portfolio composed of Asset A with an expected return of 8% and standard deviation of 15%, and Asset B with an expected return of 5% and standard deviation of 8%. If the correlation coefficient between Asset A and Asset B is -0.3, what is the primary benefit of combining these assets into a portfolio?

Answer options:

• Maximizing the overall portfolio's expected return.
• Eliminating all systematic risk from the portfolio. ✅ Reducing the overall portfolio's standard deviation (risk) for a given level of return.
• Increasing the liquidity of the portfolio through asset diversity.

Correct answer: Reducing the overall portfolio's standard deviation (risk) for a given level of return.

Explanation: A negative correlation coefficient between assets means that they tend to move in opposite directions. Combining such assets in a portfolio typically leads to a reduction in the portfolio's overall standard deviation (risk) without necessarily sacrificing return, improving diversification.