A portfolio of two securities that are perfectly positively correlated has
A) A standard deviation that is the weighted average of the individual securities standard deviations.
B) An expected return that is the weighted average of the individual securities expected returns.
C) No diversification benefit over holding either of the securities independently.
D) Both b and c
E) All of the above

Question

Quizplus · Accepted Answer

When two securities are perfectly positively correlated, their returns move in the same direction and at the same rate. This means that there is no diversification benefit to holding both securities, as they will always perform the same. As a result, the portfolio's standard deviation will be the weighted average of the individual securities' standard deviations, and its expected return will be the weighted average of the individual securities' expected returns.

A Portfolio of Two Securities That Are Perfectly Positively Correlated