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If two stocks have correlation exactly −1, the portfolio standard deviation can theoretically be reduced to:
AZero by selecting appropriate weights
BA non-zero positive minimum
CThe average of individual standard deviations
DThe geometric mean of standard deviations
Answer & Solution
Correct answer: A. Zero by selecting appropriate weights
1. Identify what the question asks: this concept maps to correlationminusone (§4.4.3.2).
2. Apply the framework or formula relevant to the topic.
3. Eliminate distractors and arrive at the correct option (A).
_Source: ICAI BoS CA Final Paper 2, Ch 6 "Portfolio Management"_
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