The risk of a portfolio consisting of two uncorrelated assets will be
A) equal to zero.
B) greater than the risk of the least risky asset but less than the risk level of the more risky asset.
C) greater than zero but less than the risk of the more risky asset.
D) equal to the average of the risk level of the two assets.

Question

Quizplus · Accepted Answer

When two assets are uncorrelated, combining them in a portfolio diversifies some of the risk away. However, it does not eliminate all risk. The total risk of the portfolio will be less than the risk of the more risky asset but greater than zero, because diversification reduces but does not eliminate risk.

The Risk of a Portfolio Consisting of Two Uncorrelated Assets