1. The primary purpose of portfolio diversification is to:

A) Increase returns and risks

B) Eliminate firm-specific risk

C) Low both returns and risks

2. When stock A’s price goes up, which of the following statements are true about the definition of “correlation”?

I. If Stock B’s correlation with A is 0.8, then it is very likely that stock B’s price will also go up

II. If Stock B’s correlation with A is 0, then Stock B’s price will definitely go down

III. If Stock B’s correlation with A is 0, then stock B’s price may (or may not) go up

IV. If stock B’s correlation with A is -1, then Stock B’s price will always go down

A) I, II, and IV

B) I, III, and IV