If there is no diversification benefit derived from combining two risky stocks into one portfolio,then the
A)returns on the two stocks must move perfectly in sync with one another.
B)returns on the two stocks must move perfectly opposite of one another.
C)stocks must have a zero correlation.
D)portfolio is equally weighted between the two stocks.
E)two stocks are completely unrelated to one another.

Question

Quizplus · Accepted Answer

The absence of diversification benefits implies that the returns on the two stocks move perfectly in sync with one another, meaning they have a correlation coefficient of +1. This perfect positive correlation means that the stocks' returns move in the same direction to the same degree, eliminating the potential for diversification to reduce risk.

If There Is No Diversification Benefit Derived from Combining Two