415.2

2.Circle any and/or all that are true:

When you put two positively correlated stocks together in a portfolio,

1. you get a portfolio whose risk is the weighted average of the risks of the individual stocks.
2. you can end up with portfolio standard deviation that is less than the lower of the two individual stock standard deviations.
3. you have not achieved any diversification.
4. you increase your risk due to the positive correlation.

"b" is the only one that is true. As long as the two stocks are not perfectly positively correlated (correlation coefficient of 1), there will be some diversification gain from the sometimes offsetting movements of the two stocks. In fact, you can even construct a portfolio whose standard deviation is lower than either of the two individual stocks' standard deviations.

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