If a portfolio is constructed with only two assets,of equal weights,and the correlation coefficient between the two assets is exactly 1.0,which of the following is true?
A)The portfolio risk reduction is maximized.
B)The return of the two assets over time are seen to follow different cycles or paths.
C)Risk is not reduced at all because of the positive correlation.
D)None of the above are true.

Question

Quizplus · Accepted Answer

When the correlation coefficient between two assets is exactly 1.0, it means that they move in perfect tandem, and there is no diversification benefit in holding both assets in a portfolio. Therefore, there is no reduction in risk due to positive correlation, and hence option C is the correct choice. Option A is incorrect because risk reduction is not maximized in this scenario. Option B is also incorrect because the correlation coefficient being 1.0 means that the two assets move in perfect tandem and follow the same cycle or path.

If a Portfolio Is Constructed with Only Two Assets,of Equal