When returns are perfectly positively correlated,the risk of the portfolio is:
A)zero
B)the weighted average of the individual securities risk
C)equal to the correlation coefficient between the securities
D)infinite

Question

Quizplus · Accepted Answer

When returns are perfectly positively correlated, the risk of the portfolio is not zero or infinite. The correlation coefficient between the securities is not the measure of the portfolio risk. The risk of the portfolio is the weighted average of the individual securities, even when the returns are perfectly positively correlated. Therefore, the correct option is B, the weighted average of the individual securities' risk.

When Returns Are Perfectly Positively Correlated,the Risk of the Portfolio