A correlation coefficient of zero indicates Question 38 options: a) there is no correlation and no risk reduction when the projects are combined. b) the projects have the same expected value. c) there is no correlation, but there is some risk reduction when the projects are combined. d) the projects have the same standard deviation.

c) there is no correlation, but there is some risk reduction when the projects are combined.

Explanation:

The correlation coefficient measures the relationship between the movement of two assets. If they are positively correlated, the assets will move in the same direction. If they are negatively correlated, the assets will move in opposite directions.

When the correlation is zero though then there will be no correlation. That does not mean that there will be no risk attached however because investing in both can still lead to a loss if both assets are affected by the same event.

The only riskless investment would be those that are perfectly negatively correlated because then you would be sure that when one makes a loss in one, a gain will definitely be made in the other.

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