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Suppose you can invest in N risky securities, but you cannot invest in risk free security....

Suppose you can invest in N risky securities, but you cannot invest in risk free security. Then, your optimal choice is to

A. invest in 1 of N securities, the one with the smallest correlation coefficient with other N-1 securities

B. invest in 1 of N securities, the one with the highest expected return and lowest standard deviation.

C. invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the capital allocation line and your indifference curve.

D. invest in the portfolio of N securities, such that each security has portfolio weight proportional to its correlation coefficient with itself.

E. invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the efficient frontier and your indifference curve

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Answer #1

Hello

Your required answer is option E : invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the efficient frontier and your indifference curve

  • Investing in 1 security will leave you with the return and S. D. Of that security and will not yield the benefit of diversification.
  • No theory asks the investor to invest in a portfolio in proportion to the weight of correlation coefficient.

Thanks

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