Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk

Question

Quizplus · Accepted Answer

When two assets have perfectly negatively correlated returns, the movement of one asset's return is completely offset by the movement of the other asset's return. The result is a portfolio with much lower overall risk than either asset individually. This is because when one asset is performing poorly, the other asset is performing well, so the overall portfolio return is much less volatile.

Combining Two Assets Having Perfectly Negatively Correlated Returns Will Result