CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
An analyst observes that the correlation between the returns of two assets is zero. The analyst's conclusion that is most accurate is that the two assets:
Zero correlation means the returns have no linear relationship. It does not prove statistical independence, because the assets could still be related in a nonlinear way, and it says nothing about how often they move in opposite directions.
- Ahave no linear relationship in their returns.Correct
- Bhave returns that are statistically independent.
- Cwill move in opposite directions half of the time.
Explanation
Correlation measures only the linear association between returns. A zero correlation means no linear relationship, but a nonlinear dependence can still exist, so statistical independence does not follow.
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