Accredited Wealth Management Advisor Practice Exam

What does a negative correlation indicate with respect to asset classes?

1. They move in the same direction

2. They have no relationship

3. They move in opposite directions

4. They are identical

The correct answer is: They move in opposite directions

A negative correlation between asset classes signifies that when the value of one asset class increases, the value of the other asset class tends to decrease, and vice versa. This relationship is beneficial for investors looking to diversify their portfolios, as negative correlations can help mitigate risk. For instance, during times of market volatility or economic downturns, if one asset class (like stocks) is losing value, another asset class (such as bonds) may gain value, thereby balancing the overall portfolio performance. The other provided options refer to different types of relationships. When asset classes move in the same direction, they exhibit a positive correlation. If there is no relationship at all, the correlation is described as zero. Lastly, claiming that they are identical suggests a perfect correlation of one, meaning they move together in perfect sync rather than in opposing directions. Thus, the indication of a negative correlation is accurately captured by the notion of moving in opposite directions.