When we combine shares in a portfolio, the amount of risk that is eliminated depends on the degree to which the shares face common risks and move together.

Question

Quizplus · Accepted Answer

When shares in a portfolio face common risks and move together, the correlation between them increases, which reduces the overall risk of the portfolio. However, if the shares do not face common risks or move together, the reduction in risk achieved by combining them in a portfolio may be limited.

When We Combine Shares in a Portfolio, the Amount of Risk