In a two-security minimum variance portfolio where the correlation between securities is greater than −1.0,
A) the security with the higher standard deviation will be weighted more heavily.
B) the security with the higher standard deviation will be weighted less heavily.
C) the two securities will be equally weighted.
D) the risk will be zero.
E) the return will be zero.

Question

Quizplus · Accepted Answer

In a minimum variance portfolio, the goal is to minimize risk. When the correlation between two securities is greater than -1.0, diversification benefits exist. To minimize risk, the portfolio will weight more heavily the security with the lower standard deviation, as it contributes less to the portfolio's overall risk. Therefore, the security with the higher standard deviation will be weighted less heavily.

In a Two-Security Minimum Variance Portfolio Where the Correlation Between