An investor holds a portfolio invested entirely in stock LMN, which has a standard deviation of 20%. Assume the investor sells 50% of his LMN holdings and invests the sale proceeds in stock XYZ, which has a 10% standard deviation and a correlation of 1.0 with stock LMN.
A. Has the investor reduced the risk of his portfolio? Explain why or why not.
B. If stock XYZ had a correlation of 0 with stock LMN, would the investor reduce portfolio risk? Explain why or why not.
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