Which of the following could reduce the risk on a portfolio to zero?
A) Appropriate allocation of funds where there is perfectly negative correlation
B) Any allocation of funds provided there is perfectly negative correlation.
C) Appropriate allocation of funds where there is perfectly positive correlation
D) Appropriate allocation of funds provided there is negative correlation.

Question

Quizplus · Accepted Answer

Appropriate allocation of funds where there is perfectly negative correlation would reduce the risk on a portfolio to zero. This is because when two assets have perfectly negative correlation, the movement of one asset is completely opposite to the movement of the other asset. Therefore, if they are combined in appropriate proportions, the overall movement of the portfolio would be zero, and hence, the risk would be eliminated.

Which of the Following Could Reduce the Risk on a Portfolio