If two investments are perfectly positively correlated:
A) there is no benefit from diversification.
B) bets are perfectly hedged and risks are canceled out.
C) diversification reduces risk without changing the expected payoff.
D) diversification reduces both risk and the expected payoff.

Question

Quizplus · Accepted Answer

If two investments are perfectly positively correlated, it means that they move in the same direction and have the same level of risk. Therefore, diversifying between these investments would not reduce risk since they are affected by the same market factors. The benefits of diversification come from investing in assets that are not perfectly correlated because they provide a hedge against systematic (market) risk.

If Two Investments Are Perfectly Positively Correlated