Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities? I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.
II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.
III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

Question

Quizplus · Accepted Answer

Statement I is false because a higher coefficient of correlation between securities actually leads to less reduction in portfolio variance. Statement II is false because the relationship between the coefficient of correlation and portfolio variance is not linear; it is quadratic.

Which of the Following Statement(s) Is(are) False Regarding the Variance