In a two-stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would
A) decrease.
B) remain constant.
C) increase.
D) fluctuate positively and negatively.
E) be a negative value.

Question

Quizplus · Accepted Answer

If the correlation coefficient between two stocks were to decrease, it means the movements of the two stocks are becoming less positively correlated. As a result, combining them in a portfolio reduces the overall risk since fluctuations in one stock may not be mirrored by fluctuations in the other, meaning there is less chance for a significant decline in the combined value of the portfolio. Therefore, the portfolio's risk would decrease.

In a Two-Stock Portfolio, If the Correlation Coefficient Between Two