What is a Positive Correlation ?


SS - upwards line
scattergram



Perfect Positive Correlation

If two variables are in perfect association then we have a "perfect positive correlation" which is expressed by a correlation coefficient of +1.
Therefore an increase in one variable corresponds with an increase in the other variable.


If the returns on two assets are perfectly positively correlated they move in perfect unison
Both the risk and the expected return is just the weighted average of the individual assets.
In this situation diversification will not reduce the risk, it merely averages it.




Things to Remember



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