You have a portfolio comprised of two risky securities.This combination produces no diversification benefit.The lack of diversification benefits indicates the returns on the two securities:
A)are too low for their level of risk.
B)move perfectly opposite of one another.
C)are too large to offset.
D)move perfectly in sync with one another.
E)are completely unrelated to one another.

Question

Quizplus · Accepted Answer

The lack of diversification benefits implies that the returns on the two securities move perfectly in sync with one another. This means that the correlation between the two securities is +1, indicating that they are highly positively correlated and their returns move in the same direction at the same time. When the returns of the two securities move together, there is no diversification benefit from holding both of them in a portfolio. This suggests that the portfolio is not well diversified and may be too risky if the securities experience significant losses simultaneously.

You Have a Portfolio Comprised of Two Risky Securities