CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio
An analyst finds that the correlation between the returns of two assets is zero. The analyst's conclusion that is most appropriate is that the two assets:
Zero correlation means the two assets have no linear relationship. It does not prove statistical independence, because returns could still be related in a nonlinear way, and it certainly does not mean they move in opposite directions, which would give a negative correlation.
- Ahave no linear relationshipCorrect
- Bare statistically independent
- Calways move in opposite directions
Explanation
Zero correlation means there is no linear relationship between the returns. It does not rule out a nonlinear dependence, so independence cannot be concluded. Opposite movement would imply a negative correlation, near -1 if always.
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