Question

In a portfolio that contains two assets it is possible that there is no benefit to diversification from moving from a single asset to two assets. Why can this happen?Select one:

a. It happens if returns on the assets in the portfolio are perfectly positively correlated.

b. It happens if each of the assets is a common share.

c. It happens if returns on one asset are negatively correlated with returns on the other asset.

d. The statement is incorrect – moving from a single asset to two assets always provides a benefit.e. None of the above.

Answer 1

Hi,

if the two assets are perfectly positively correlated then there is no benefit of diversification since assets return will move in same direction.

Hence option a is correct here.

Thanks