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A portfolio of two perfectly _________ stocks has no diversification effect Group of answer choices uncorrelated...

A portfolio of two perfectly _________ stocks has no diversification effect Group of answer choices

uncorrelated

negatively correlated

positively correlated

risk-free

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Answer #1

The correct answer is positively correlated

Correlation refers to the strength of liner relationship between two variables. It lies between -1 and +1. Lower the correlation, greater the benefit of diversification in the form of risk reduction. Therefore if we have portfolio with two positively correlated stocks then there will be no benefit of diversification in the form of risk reduction.

A portfolio of two perfectly negatively correlated stocks will achieve maximum diversification benefit.

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