How does diversification work when stocks are positively correlated?

In the context of positive correlation among stocks, diversification has specific characteristics that affect overall risk. When stocks are positively correlated, their prices tend to move in the same direction. This means that when one stock's value increases, the others are likely to increase as well, and similarly for decreases.

As a result, diversifying by including a variety of positively correlated stocks does not significantly reduce overall portfolio risk because the assets are likely to be influenced by the same market factors. Therefore, the risk associated with the portfolio largely remains unchanged; the movements in asset prices offset each other to a very limited extent.

In contrast, if stocks were negatively correlated, diversification would be more effective at reducing risk since the poor performance of one stock could be offset by the better performance of another. However, in the case of positively correlated stocks, the impact of diversification on risk is minimal, leading to the conclusion that it effectively has no impact on reducing overall risk.