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Explain how the relationship between assets in a portfolio dominates the portfolio risk.

Explain how the relationship between assets in a portfolio dominates the portfolio risk.

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Answer #1

Relationship between assets will determine the total risk of any portfolio for example if there is a positive correlation between the assets in a portfolio then the portfolio risk will be same as the risk of asset. Similarly if the correlation between assets are negative then the portfolio risk will reduce because in that case the risk is mitigated by the negative correlation between the asset.

Thus one should find the asset where the assets are not perfectly correlated, which will reduce the portfolio risk.

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