Question

Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that​ ________. A. remains unchanged B. increases to a level above that of either asset C. decreases to a level below that of either asset D. lies between the asset with the higher risk and the asset with the lower risk

Answer 1

Answer:

The correct option is (B)

Explanation:

The main objective of creating a portfolio is to minimise the overall risk of investments. Two investments with the same correlation signs are riskier because, if one investment gives a negative return, the other investment will do the same. The combined loss is more than the loss one investment will sustain. The portfolio is always constructed by adding investments with opposite correlation signs.