When a new stock is introduced into a portfolio and the ups and downs of its return appear to coincide with those of the portfolio's return, the stock's return is said to be perfectly positively correlated with the portfolio's, and its addition will reduce portfolio risk.

Question

Quizplus · Accepted Answer

Perfect positive correlation means the stock moves exactly in tandem with the portfolio, but adding such a stock does not reduce portfolio risk; diversification, which involves adding assets with low or negative correlation, is what typically reduces risk.

When a New Stock Is Introduced into a Portfolio and the Ups