Hey everyone,
Here is a question i came across :
To me there are diversification benefits even if correlation is equal to one. The table below shows how the standard deviation of a portfolio of two risky assets X and Y changes, depending on the weighting we allocate to asset X. And from what i see, when both assets correlation is equal to 1, there is a benefit to diversification…
By correlation benefit we mean, specifically, that the standard deviation of the portfolio’s returns is less than the weighted average of the standard deviations of returns of the constituent securities. When the correlation of returns is +1.0, the standard deviation of the portfolio’s returns equals the weighted average of the standard deviations of the constituent securities, so it is not less than that, so there’s no diversification benefit.
Thanks S2000magician, makes complete sense. Tested it on Excel too :
If I can make complete sense on a Saturday morning, I’m happy.
And a little bit stunned.
You should. Plus it’s saturday night here in France, so you have even more merit!
