In a two stock portfolio,if the correlation coefficient between two stocks were to decrease over time,everything else remaining constant,the portfolio's risk would
A) Decrease.
B) Remain constant.
C) Increase.
D) Fluctuate positively and negatively.
E) Be a negative value.

Question

Quizplus · Accepted Answer

The correlation coefficient measures the degree to which the returns of two assets move in relation to each other. A decrease in the correlation coefficient indicates that the two assets are becoming less correlated, or less dependent on each other. As such, the portfolio's overall risk would decrease as the diversification benefit of holding two uncorrelated assets is greater than holding two highly correlated assets.

In a Two Stock Portfolio,if the Correlation Coefficient Between Two