If the covariance between two investments of a portfolio is zero,the variance of the portfolio will be equal to the sum of the variances of the investments.

Question

Quizplus · Accepted Answer

When the covariance between two investments of a portfolio is zero, it means that there is no linear relationship between the two investments. In such a case, their returns are not expected to move in the same direction or opposite direction together. The variance of a portfolio is affected by both the variance of individual investments as well as their covariance. When the covariance is zero, only the individual variances contribute to the portfolio variance. Therefore, the variance of the portfolio will be equal to the sum of the variances of the individual investments.

If the Covariance Between Two Investments of a Portfolio Is