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Statement: If we add new asset to the portfolio which has the higher covariance with the portfolio than “most of assets”, the portfolio risk will increase.
I highly doubt that statement since it depends on 2 more factors: 1) weight of new asset in portfolio and 2) variance of added asset.
Any thoughts?
If all assets move together it creates risk. I.e. if the market corrects and all your assets fall. If all assets don’t all move together, there might not be as large of a loss.
Exactly, they asked you if the portfolio risk would increase in the event of adding another risky asset with high correlation with existing ones and the answer is yes, it would increase the total risk of portfolio.
Your reasoning is correct, the level of risk increase depends on mentioned factors but it is irrelevant for this question.