If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is:
A) less than the weighted average of the two individual variances.
B) greater than the weighted average of the two individual variances.
C) equal to the weighted average of the two individual variances.
D) less than or equal to average variance of the two weighted variances, depending on other information.

Question

Quizplus · Accepted Answer

When the correlation between two stocks is +1, it means they move perfectly in tandem. In this case, the portfolio's variance will be equal to the weighted average of the two individual variances, as there is no diversification benefit to reduce or increase the variance beyond the weighted average.

If the Correlation Between Two Stocks Is +1, Then a Portfolio