You are graphing the investment opportunity set for a portfolio of two securities with the expected return on the vertical axis and the standard deviation on the horizontal axis. If the correlation coefficient of the two securities is +1, the opportunity set will appear as which one of the following shapes?
A)conical shape
B)linear with an upward slope
C)combination of two straight lines
D)hyperbole
E)horizontal line

Question

Quizplus · Accepted Answer

If the correlation coefficient of the two securities is +1, then the opportunity set will be a linear combination of the two securities without any diversification benefits. The portfolio of the two securities will have a standard deviation equal to the weighted average of the standard deviation of the two assets, and the expected return will be the weighted average of their expected returns. Therefore, the opportunity set will be a straight line with an upward slope.

You Are Graphing the Investment Opportunity Set for a Portfolio