You have a portfolio of two risky shares which turns out to have no diversiﬁcation beneﬁt.The reason you have no diversiﬁcation is the returns:
A)are too small.
B)move perfectly opposite of one another.
C)are too large to offset.
D)move perfectly with one another.
E)are completely unrelated to one another.

Question

Quizplus · Accepted Answer

If the returns of the two shares move perfectly with one another, then they are highly positively correlated, meaning that they tend to move in the same direction at the same time. This eliminates the diversification benefit, as both shares would be affected similarly by any market events or shocks. Therefore, D is the best choice.

You Have a Portfolio of Two Risky Shares Which Turns