Certified Plan Sponsor Professional (CPSP) Practice Exam

Assets that tend to move in opposite directions in the same market condition are referred to as being?

1. Positively correlated.

2. Negatively correlated.

3. Uncorrelated.

4. Consistently correlated.

The correct answer is: Negatively correlated.

The concept of assets moving in opposite directions in the same market conditions is defined as being negatively correlated. When two assets exhibit negative correlation, it means that as the value of one asset increases, the value of the other asset tends to decrease, and vice versa. This relationship is particularly valuable in investment strategies, as it can help reduce overall portfolio risk. By combining negatively correlated assets, investors can create a more balanced portfolio that is less sensitive to market fluctuations. For instance, during periods of market downturns, a negatively correlated asset may provide a buffer to losses experienced by the other assets in the portfolio. Understanding the correlation among different investments is crucial for effective risk management and asset allocation.