If an investor holds two risky assets with a perfect negative correlation, then risk
A) falls to zero.
B) is increased.
C) is unaffected.
D) is reduced by 50 percent.

Question

Quizplus · Accepted Answer

When two assets have a perfect negative correlation, their prices move in opposite directions. This means that when one asset goes up, the other goes down by the same amount. By holding a combination of these two assets, the overall portfolio risk is reduced, and if the correlation is perfect, it falls to zero. Therefore, in this scenario, risk falls to zero.

If an Investor Holds Two Risky Assets with a Perfect