CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio
A portfolio manager finds that the correlation between two assets' returns is zero. Which statement is most accurate?
A zero correlation means the assets have no linear relationship. Correlation captures only linear association, so the returns could still be related in a nonlinear way. It says nothing about the relative size of their standard deviations.
- AThe assets have no relationship of any kind
- BThe assets have no linear relationshipCorrect
- CThe assets must have equal standard deviations
Explanation
Correlation measures only linear association. Zero correlation can coexist with a nonlinear dependence, so the first option overstates. Standard deviations are unrelated to a zero correlation.
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