Question

The principle of diversification teaches us that using two securities it is always possible to find a portfolio with no short positions with a variance that is:_______
A. Zero
B. Less than the variance of each asset
C. Less than the variance of each asset, except when the two assets are perfectly positively correlated.
D. None of the above.

Answer 1

Answer:

C. Less than the variance of each asset, except when the two assets are perfectly positively correlated.

Explanation:

In diversification, there is the less risk in the portfolio that can be determined by the standard deviation. Also the risk can decrease at the time when the asset is lower than the perfect correlation and the same should be place in portfolio. Now if the asset along perfect positive correlation place in the portfolio so the the portfolio risk could be large than the risk of the individuals assets