If ABC Inc. and XYZ Inc. have returns that are perfectly positively correlated:
A) adding XYZ Inc to a portfolio that consists of only ABC Inc. will reduce risk.
B) adding ABC Inc to a portfolio that includes only XYZ Inc. will increase risk.
C) adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase nor decrease the risk of the portfolio.
D) adding XYZ Inc to a portfolio that consists of only ABC Inc. will neither increase nor decrease idiosyncratic risk but will lower systematic risk.

Question

Quizplus · Accepted Answer

When two assets are perfectly positively correlated, adding one to a portfolio that already includes the other does not change the overall risk of the portfolio because their returns move exactly in tandem.