The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________.
A) more than 15%
B) less than 30%
C) unchanged at 30%
D) equal to 15%

Question

Quizplus · Accepted Answer

When two assets have a correlation of 1, their returns move perfectly together. The portfolio volatility is a weighted average of the individual volatilities, and if one asset has a higher volatility, the portfolio volatility will be closer to the higher volatility asset, which is 30% in this case.

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