Lesson Overview
Make diversification visible so correlation questions become intuitive.
Level I questions are three-choice multiple choice and are built to reward fast recognition of the relevant rule, relationship, or calculation path. For this lesson, the job is to turn the topic into a repeatable exam move rather than another note to reread.
Mental Model
Scattered asset dots flow into a portfolio sphere while risk bands compress or expand with correlation.
In the Above MPS system, this sits in Portfolio Control Panel: Control the risk. Use that shape as the memory hook, then connect it to the precise facts in the question stem.
Exam Playbook
- Name the topic before calculating. Decide whether the stem is asking for a definition, direction of effect, classification, or numerical result.
- Apply the rule that changes the answer. Ignore details that do not affect the relationship being tested.
- Check the answer against the common trap. If the tempting choice matches one of the traps below, slow down before locking it in.
High-Yield Map
- Low correlation creates diversification benefit.
- Portfolio risk depends on weights, individual risk, and co-movement.
- Not all risk can be diversified away.
Common Traps
- Assuming more assets always means lower risk.
- Ignoring correlation sign and magnitude.
- Confusing total risk with systematic risk.
Repair Drills
- Rank three portfolios by diversification benefit.
- Explain why correlation matters more than asset count alone.