The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

Question

Quizplus · Accepted Answer

When two assets have perfectly positively correlated returns, their prices move in the same direction over time. Although combining them in a portfolio may provide diversification benefits in terms of expected return, it cannot reduce the overall risk below the risk of the least risky asset, because the two assets will move in tandem, so their combined risk will be just the sum of their individual risks.

The Creation of a Portfolio by Combining Two Assets Having