Explanation

Correct Answer: C

Why C is incorrect:

• A correlation coefficient of 0 means there is no linear relationship between the returns of two assets, not that they move proportionately in a negative direction.
• Zero correlation indicates that the returns move independently of each other, with no predictable pattern of movement.

Why the other options are correct interpretations:

A: A correlation coefficient of +1 indicates a perfect positive linear relationship. When one asset's returns increase, the other's returns increase proportionately in the same direction.

B: A correlation coefficient of -1 indicates a perfect negative linear relationship. When one asset's returns increase, the other's returns decrease proportionately in the opposite direction.

D: This option would be correct if all interpretations were accurate, but since C is incorrect, D is not the correct answer.

Key Concepts:

• Correlation coefficient (ρ) ranges from -1 to +1
• +1 = Perfect positive correlation
• -1 = Perfect negative correlation
• 0 = No linear correlation (returns are uncorrelated)
• The correlation coefficient measures the strength and direction of the linear relationship between two variables.