Owning two securities instead of one will not improve a portfolio's risk-return tradeoff if the two securities are:
A)perfectly positively correlated with each other.
B)perfectly independent of each other.
C)perfectly negatively correlated with each other.
D)of the same category,e.g.blue chips.

Question

Quizplus · Accepted Answer

Owning two securities that are perfectly positively correlated with each other means that they move in tandem and have similar returns and risks, which does not improve a portfolio's risk-return tradeoff. Diversification is achieved by including assets with different risk and return characteristics in a portfolio. Owning two securities that are perfectly negatively correlated with each other would provide some risk reduction, but it would not necessarily improve the portfolio's expected return. Two securities that are independent of each other would provide some diversification benefit, but not as much as owning securities with negative correlation. Therefore, the best choice is A, owning two securities that are perfectly positively correlated with each other, as this would not improve the portfolio's risk-return tradeoff.

Owning Two Securities Instead of One Will Not Improve a Portfolio's