When diversifying, what is the impact of having stocks that are perfectly positively correlated?

When stocks are perfectly positively correlated, it means that they move in the same direction at the same rate. Therefore, when one stock experiences a gain or loss, the other stock will experience a similar gain or loss simultaneously. This correlation does not provide the benefits typically associated with diversification, which aims to reduce the overall risk of a portfolio.

When constructing a diversified portfolio, the goal is to include assets that do not move in tandem—this way, when some assets decrease in value, others may increase, providing a cushion against losses. However, with perfectly positively correlated stocks, the volatility of your portfolio remains unchanged because the risks of investing in these assets are not mitigated. This means that having multiple such stocks in your portfolio does not effectively reduce your exposure to market risks; rather, it simply amplifies the risks you already face because they will all react in the same manner to market fluctuations.

As a result, instead of achieving optimal risk reduction through diversification, holding perfectly positively correlated stocks leads to a lack of risk mitigation, confirming that this strategy does not aid in reducing the overall risk of an investment portfolio.