Assume that you own a portfolio with a known average return and standard deviation. Which of the following stocks, if added to your portfolio, will not reduce its risk through diversification?
A)A stock whose return is negatively correlated with that of your portfolio and has a lower standard deviation.
B)A stock whose return is positively correlated with that of your portfolio and has a lower standard deviation.
C)A stock whose return is positively correlated with that of your portfolio and has a higher standard deviation than your stock.
D)All of the above will reduce the risk of your investment through diversification.
E)None of the above will reduce the risk of your investment through diversification.

Question

Quizplus · Accepted Answer

Adding a stock that is positively correlated with your portfolio and has a higher standard deviation increases overall risk, not reducing it through diversification.

Assume That You Own a Portfolio with a Known Average