As long as the coefficient of correlation between two stocks is less than +1,some reduction in risk can be obtained by combining the securities.

Question

Quizplus · Accepted Answer

Combining two securities with a coefficient of correlation less than +1 can result in a reduction of overall risk in a portfolio due to diversification benefits. Diversification helps to reduce the overall volatility of a portfolio by spreading risk across different assets. However, if the coefficient of correlation is +1, combining the securities would not result in any reduction in risk as they would move perfectly in tandem.

As Long as the Coefficient of Correlation Between Two Stocks