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 significantly because of the positive correlation.
D) None of the above are true.

Question

Quizplus · Accepted Answer

If the correlation coefficient between the two assets is exactly 1.0, it means that they move in perfect tandem with each other, and there is no diversification benefit. Therefore, risk is not reduced significantly because of the positive correlation.

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