The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%.When I hold both stocks in my portfolio with an equal amount in each,and the stocks' returns have a correlation of minus 1,the overall volatility of returns of the portfolio is
A)more than 30%.
B)unchanged at 30%.
C)between 0 and 30%.
D)zero.
E)Cannot say for sure

Question

Quizplus · Accepted Answer

When the correlation between the two stocks is negative (-1), it means that the returns of one stock move in the opposite direction of the other. This has a diversifying effect on the portfolio, as the losses in one stock may be offset by gains in the other. Therefore, the overall volatility of the portfolio will be lower than the sum of the individual volatilities of the two stocks. In fact, when the correlation is -1, the overall volatility of the portfolio will be zero, as the fluctuations of the two stocks will cancel each other out. This means that the answer is D, zero.

The Volatility of Home Depot Share Prices Is 30% and That