A portfolio that combines two assets having perfectly positively correlated returns can not 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, they move in the same direction at the same time. As a result, diversification benefits are limited as the portfolio's overall risk cannot be reduced below the risk of the least risky asset. Therefore, it is true that a portfolio that combines two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

A Portfolio That Combines Two Assets Having Perfectly Positively Correlated