Question

Under what circumstance is the risk of the portfolio not lower than the weighted average of...

Under what circumstance is the risk of the portfolio not lower than the weighted average of the risk of the individual securities in the portfolio? Explain your answer.
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The risk of the portfolio is not lower than the weighted average of the risk of the individual securities in the portfolio when the correlation between the assets is equal to 1.

Considering two asset portfolio, we know, the formula of risk of portfolio (standard deviation) is:

Where, weight of asset 1 in portfolio

risk (standard deviation) of asset 1

correlation coefficient between asset 1 and asset 2.

Hence, when correlation coefficient =1,

Which is the weighted average of the risk of the 2 assets.

Please do rate me and mention doubts in the comments section.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The standard deviation of a portfolio: A) Measures the amount of diversifiable risk inherent in the...
The standard deviation of a portfolio: A) Measures the amount of diversifiable risk inherent in the portfolio. B) Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio. C) Is a measure of that portfolio's systematic risk. D) Serves as the basis for computing the appropriate risk premium for that portfolio. E) Is a weighted average of the standard deviations of the individual securities held in that portfolio
holding a portfolio of securities across sections and industries can reduce risk through diversification because a)...
holding a portfolio of securities across sections and industries can reduce risk through diversification because a) it lowers the individual securities risk premiums b) it lowers the portfolio's non diversifiable risk c)it reduces systemic risk of the portfolio d) the portfolio standard deviation is lower than the weighted average of the individual security standard deviations e) it lowers the beta of the portfolio to to 0
The standard deviation of a portfolio: Is a weighted average of the standard deviations of the...
The standard deviation of a portfolio: Is a weighted average of the standard deviations of the individual securities held in the portfolio. Can never be less than the standard deviation of the most risky security in the portfolio. Must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. Is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. Can be less than the standard deviation...
The standard deviation of a portfolio: Multiple Choice is a weighted average of the standard deviations...
The standard deviation of a portfolio: Multiple Choice is a weighted average of the standard deviations of the individual securities held in the portfolio. can never be less than the standard deviation of the most risky security in the portfolio. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. can be less than the...
A well-diversified portfolio has an expected return that is _______ the weighted average of the expected...
A well-diversified portfolio has an expected return that is _______ the weighted average of the expected returns of the assets inside of it and a risk level that is _______ the weighted average of the risk levels of the assets inside of it. Pick one of the choices below to fill in the blanks above in order. Select one: Higher Than; Higher Than Higher Than; Equal To Higher Than; Lower Than Equal To; Higher Than Equal To; Equal To Equal...
18. Which of the following statements about the minimum variance portfolio of all risky securities are...
18. Which of the following statements about the minimum variance portfolio of all risky securities are valid? (Assume short sales are allowed.) i. Its variance must be lower than those of all other securities or portfolios. ii. Its expected return can be lower than the risk-free rate. iii. It may be the optimal risky portfolio. iv. It must include all individual securities. 19. Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and...
I cannot find the Weighted-average lower-of-cost-or-market. Lower-of-Cost-or-Market For the weighted-average method, round calculations to two decimal...
I cannot find the Weighted-average lower-of-cost-or-market. Lower-of-Cost-or-Market For the weighted-average method, round calculations to two decimal places. If required, round your final answers to the nearest cent. 1. Calculate the total amount to be assigned to the ending inventory under each of the following periodic inventory methods: a. FIFO b. Weighted-average 2. Assume that the market price per unit (cost to replace) of Stalberg's inventory on December 31, 20--, was $26. Calculate the total amount to be assigned to the...
6. Portfolio expected return and risk A collection of financial assets and securities is referred to...
6. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return. Analyzing portfolio risk and return involves the understanding of expected...
5. Diversification reduces the overall risk of a portfolio because of a factor called correlation. Explain...
5. Diversification reduces the overall risk of a portfolio because of a factor called correlation. Explain how a stock with a return standard deviation of 20% can be combined with a stock with a return standard deviation of 13.2% and result in a portfolio whose return standard deviation is much lower than the standard deviations of the two individual stocks? What is it about the correlation coefficient between stocks which reduces portfolio risk?
1.Which of the follwing statements about portfolio risk are true. a) the riskiness of a portfolio...
1.Which of the follwing statements about portfolio risk are true. a) the riskiness of a portfolio is the weighted average of the imdividual assets' standard deviations b) two stocks can be individually quite risky but when they are combined to form a portfolio it is possible that they are not risky at all c) diversification only wants to reduce risk if you portfolios and fix it perfectly positively related stocks (securities) d) all of the above 2. which of the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT