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) zero
D) equal to 60%

Question

Quizplus · Accepted Answer

When the correlation between two assets is -1, it means that they move in completely opposite directions. Therefore, when one stock is performing well, the other is performing poorly, which can help to reduce the volatility of the overall portfolio. In this case, since the correlation is -1, the volatility of the portfolio will be zero because the gains from one stock will always offset the losses from the other stock, resulting in a net return of zero.

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