You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns:
A) are too small.
B) move perfectly opposite of one another.
C) are too large to offset.
D) move perfectly with one another.
E) are completely unrelated to one another.

Question

Quizplus · Accepted Answer

When the returns of two stocks move perfectly with one another there is no diversification benefit because they are highly correlated, meaning they tend to move in the same direction. In other words, if one stock does well, the other is likely to do well also, leaving your portfolio exposed to the risks of both stocks.

You Have a Portfolio of Two Risky Stocks Which Turns