If ABC Inc.and XYZ Inc.have returns that are perfectly positively correlated:
A)Adding XYZ Inc to a portfolio that consists of only ABC Inc.will reduce risk.
B)Adding ABC Inc to a portfolio that includes only XYZ Inc.will increase risk.
C)Adding XYZ Inc.to a portfolio that consists of only ABC Inc.will neither increase nor decrease the risk of the portfolio.
D)Adding XYZ Inc to a portfolio that consists of only ABC Inc.will neither increase nor decrease idiosyncratic risk but will lower systematic risk.

Question

Quizplus · Accepted Answer

When two assets are perfectly positively correlated, adding one to a portfolio of the other does not change the overall risk, as their returns move together in the same direction.