If the returns of two assets are perfectly positively correlated, an investor who puts half of his/her savings into each will:
A)Reduce risk
B)Have a higher expected return
C)Not gain from diversification
D)Reduce risk but lower the expected return

Question

Quizplus · Accepted Answer

Investing in two assets with perfectly positively correlated returns does not provide any diversification benefits as the assets move in the same direction at the same time. Therefore, the investor will not reduce risk by putting half of his/her savings into each. However, the expected return will be higher than investing in just one of the assets.

If the Returns of Two Assets Are Perfectly Positively Correlated