Is it possible to form a low risk portfolio by combining two very risky stocks in...

Is it possible to form a low risk portfolio by combining two very risky stocks in the portfolio? Explain why or why not.

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Expert Solution

YES, it is possible to form a low risk portfolio by combining two very risky stock in the portfolio if they are highly negatively correlated with each other, so the movement of one stock will be completely negated by the movement of the Other stock so there will be a elimination of risk to a large extent due to diversification and high negative correlation so it can be said that if there is a negative correlation and if two stocks are very high risky and they are in the opposite industry and they are not reacting in similar manner to event in the economy then, these stocks can have the possibility of elimination of risk to large extent.

Hence, it is possible to form a low risk portfolio of stocks by combining two very risky stocks in the portfolio as if we are selecting the stocks from highly diverse industries, then there will be a elimination of risk related to to movement of stocks and can cut out the risk and reduce it.

jeff jeffy answered 1 year ago

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