Combining shares with perfectly correlated shares returns into a portfolio is less risky than holding an individual share since the portfolio will benefit from diversification.

Question

Quizplus · Accepted Answer

Combining shares with perfectly correlated returns actually does not result in diversification and therefore the portfolio is not less risky than holding an individual share. In fact, the portfolio will have the same risk as holding a single share. True diversification comes from combining shares with uncorrelated or negatively correlated returns.

Combining Shares with Perfectly Correlated Shares Returns into a Portfolio