A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Question

Quizplus · Accepted Answer

By combining two assets with less than perfectly positive correlation, the fluctuations in one asset may be offset by the fluctuations in the other asset, resulting in lower total risk for the portfolio. This is known as diversification, and it is a key concept in modern portfolio theory. However, it should be noted that diversification cannot eliminate all risk.

A Portfolio Combining Two Assets with Less Than Perfectly Positive