A Portfolio of Two Securities That Are Perfectly Positively Correlated

question 61

Multiple Choice

A portfolio of two securities that are perfectly positively correlated has

• A) A standard deviation that is the weighted average of the individual securities standard deviations.
• B) An expected return that is the weighted average of the individual securities expected returns.
• C) No diversification benefit over holding either of the securities independently.
• D) Both b and c
• E) All of the above

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Definitions:

Linear Thinking

A thought process that follows a straight, direct path to reach a conclusion or solution, often focusing on sequential steps.

Causality

The relationship between a cause and its effect, where one event is understood to be a consequence of the other.

Sophisticated

Having a refined knowledge of the world, complex or developed in a way that is not immediately obvious.

Centrated Thinking

A cognitive phenomenon in early childhood, where a child focuses on one aspect of a situation while neglecting others, indicative of preoperational thinking according to Jean Piaget.