October [censored] thread

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Only question I got wrong is this, could someone explain it to me?

Q: The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coeffcient between the two securities is..

A) 0
B) 1.0
C) .5
D) -1
E) negative

I answered E, the correct answer is d? I assumed if you balance the weights and can go over 100% in one security and short the other as long as there is a neg correlation we can reduce variance to zero.

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D is the correct answer, of course. You need to balance the weights even with the correlation of -1. Without perfect correlation, you can't reduce variance to zero. To see this, take, say SPY and some sort of ETF that has negative beta and see if you can combine them to produce zero variance. You can't, if either has any variance.