If the return on two stocks is highly and positively correlated (i.e., correlation coefficient=+1.0), combining these stocks will reduce the risk associated with the portfolio.

Question

Quizplus · Accepted Answer

When two stocks have a correlation coefficient of +1.0, it means they move perfectly in sync with each other. Therefore, combining them does not diversify the risk because any event affecting one stock's return is likely to affect the other's in the same way.

If the Return on Two Stocks Is Highly and Positively