New Enroll in RBI Grade B New Batch - Starts on May 21

    Question

    A portfolio consisting of two risky securities can be

    made risk-less i.e, σp = 0, if:
    A The securities are perfectly positively correlated. Correct Answer Incorrect Answer
    B The securities are perfectly negatively correlated. Correct Answer Incorrect Answer
    C The securities are moderately positively correlated. Correct Answer Incorrect Answer
    D The correlation ranges from 0 to 1. Correct Answer Incorrect Answer

    Solution

    A portfolio consisting of two risky securities can be made risk-less (i.e., σp = 0) if: The securities are perfectly negatively correlated. When two securities in a portfolio are perfectly negatively correlated, it means that they move in exact opposite directions. When one security's value goes up, the other's value goes down by the same amount, and vice versa. By combining two perfectly negatively correlated securities in a portfolio, the fluctuations cancel each other out, resulting in a risk-less portfolio. This is because any gain in one security offsets the loss in the other, and the overall portfolio value remains constant regardless of market movements.

    Practice Next