A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

Question

Quizplus · Accepted Answer

When two assets have perfectly positive correlation, their returns move in the same direction and by the same magnitude. Therefore, combining them in a portfolio does not reduce their overall risk. The portfolio's risk is equal to the weighted average of the individual asset's risks. If one of the assets is less risky, the portfolio's overall risk will be higher than that asset but cannot be lower.

A Portfolio That Combines Two Assets Having Perfectly Positive Correlation