In general, when the correlation coefficient between the returns on two securities is ____, the risk of a portfolio is ____ the weighted average of the total risk of the two individual securities.
A) equal to +1.0; equal to
B) less than +1.0; less than
C) a and b
D) none of the above

Question

Quizplus · Accepted Answer

When the correlation coefficient between the returns on two securities is less than +1.0, the risk of a portfolio is less than the weighted average of the total risk of the two individual securities. This is because the correlation coefficient measures the degree to which the returns on two securities move together. A correlation coefficient of +1.0 indicates that the returns on two securities move perfectly together, while a correlation coefficient of -1.0 indicates that the returns on two securities move perfectly in opposite directions. A correlation coefficient of 0 indicates that there is no relationship between the returns on two securities.

In General, When the Correlation Coefficient Between the Returns on Two