A portfolio of two securities that are perfectly positively correlated has
A) A standard deviation that is the weighted average of the individual securities standard deviations.
B) An expected return that is the weighted average of the individual securities expected returns.
C) No diversification benefit over holding either of the securities independently.
D) Choices b and c
E) All of the above.

Question

Quizplus · Accepted Answer

A portfolio of two securities that are perfectly positively correlated has no diversification benefit over holding either of the securities independently. This is because the returns of the two securities will always move in the same direction, so there is no way to reduce risk by diversifying between them.

A Portfolio of Two Securities That Are Perfectly Positively Correlated