Explanation:

When defining asset classes, several criteria must be considered. An asset class should consist of relatively homogeneous assets while offering diversification benefits relative to other asset classes. Statistically, risk and return expectations should be comparable, and correlations between assets within the same class should be high, while correlations with assets in other classes should be lower.

• Option A (0.0): A correlation of zero between asset classes indicates well-defined asset classes, as it suggests strong diversification benefits. This is the most preferable scenario.

• Option B (0.5): A correlation of 0.5 suggests less distinct asset classes compared to a zero correlation, as it implies weaker diversification.

• Option C (1.0): A correlation of 1.0 indicates poorly defined asset classes, as it implies no diversification benefits. This might be chosen if the candidate confuses the criteria for correlations across asset classes (which should be low) with correlations within an asset class (which should be high).