What does it mean if an investment is said to have a negative correlation with another investment?

What does it mean if an investment is said to have a negative correlation with another investment?

• A. The investments move in the same direction
• B. One investment's return rises while the other falls
• C. The investments have similar levels of risk
• D. The investments have no influence on each other

Answer: (B)

When an investment is described as having a negative correlation with another investment, it indicates that the two investments move in opposite directions. Specifically, this means that when one investment's return increases, the return of the other investment tends to decrease, and vice versa. This relationship can be quite valuable in portfolio management and risk mitigation. Investors often seek to include negatively correlated assets in their portfolios to help balance risks; if one asset is performing poorly, the other might perform well, potentially offsetting losses. Understanding correlations in this way aids investors in constructing a diversified portfolio that can bear different market conditions, thereby improving overall risk-adjusted returns. This is why option B accurately captures the essence of negative correlation, as it emphasizes the inverse relationship between the returns of the two investments.

When an investment is described as having a negative correlation with another investment, it indicates that the two investments move in opposite directions. Specifically, this means that when one investment's return increases, the return of the other investment tends to decrease, and vice versa.

This relationship can be quite valuable in portfolio management and risk mitigation. Investors often seek to include negatively correlated assets in their portfolios to help balance risks; if one asset is performing poorly, the other might perform well, potentially offsetting losses.

Understanding correlations in this way aids investors in constructing a diversified portfolio that can bear different market conditions, thereby improving overall risk-adjusted returns. This is why option B accurately captures the essence of negative correlation, as it emphasizes the inverse relationship between the returns of the two investments.