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A medium-sized investment firm engages in a variety of transactions and has implemented netting arrangements to manage risk for its 8 equity trade positions, which possess an average correlation coefficient of 0.28. The firm is confident that they can further enhance the diversification benefits through adjustments to the existing netting agreement. Considering that the future trade positions' values are normally distributed, identify which of the following trade combinations would lead to the greatest improvement in the firm's expected netting benefit as compared to the current arrangement?
Trade Combination | Number of Positions | Average Correlation |
---|---|---|
ABC | 4 | 0.25 |
LMN | 7 | 0.15 |
PQR | 13 | -0.06 |
TUV | 15 | -0.04 |
Section: Credit Risk Measurement and Management