You have a portfolio of two risky stocks that has no diversification benefit.The lack of any diversification benefit must be due to the fact that:
A)the returns on the two stocks move perfectly in sync with one another.
B)the returns on the two stocks move perfectly opposite of one another.
C)one security must be a risk-free security.
D)the portfolio is equally weighted between the two stocks.
E)the two stocks are completely unrelated to one another.

Question

Quizplus · Accepted Answer

The lack of diversification benefit indicates that the two stocks move perfectly in sync with one another, meaning they have a high positive correlation. When two stocks have a high positive correlation, their returns tend to move up or down together, leading to little to no diversification benefit.

You Have a Portfolio of Two Risky Stocks That Has