Given below are two statements: One is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): If the securities with less than perfect negative correlation between their price movements are combined, portfolio risk can be reduced significantly.
Reason (R): The term with negative correlation has the effect of reducing the computed value of total portfolio risk, given other terms that are positive.
In the light of the above statements, choose the most appropriate answer from the options given below:
1
Both (A) and (R) are correct and (R) is the correct explanation of (A).
2
Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).
3
(A) is correct but (R) is incorrect.
4
(A) is incorrect but (R) is correct.