Question

If your objective is to reduce overall portfolio risk as much as possible, which stocks should...

If your objective is to reduce overall portfolio risk as much as possible, which stocks should you put into your portfolio?

Multiple Choice

  • Stocks that have the highest expected returns

  • Stocks with returns that are positively correlated

  • Stocks with returns that are not correlated

  • Stocks with returns that have the highest specific risk

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The correct answer is Stocks with returns that are not correlated

Diversification benefit - We should not invest our wealth in a single stock. We should invest in a portfolio. Whenever we combine two or more assets in a portfolio the risk gets reduced. The extent of risk reduction depends on correlation.
Maximum benefit from diversification occurs when the correlation coefficient for pairs of stocks is minus one.
Correlation refers to the strength of liner relationship between two variables. It lies between -1 and +1. Lower the correlation, greater the benefit of diversification in the form of risk reduction. Therefore to reduce the risk of overall portfolio we should add stocks with returns that are not correlated.

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
Your human capital is risky and positively correlated with the overall performance of the stock market....
Your human capital is risky and positively correlated with the overall performance of the stock market. According to Modern Portfolio Theory, you have concluded that you should invest 75 % of your wealth to the optimal risky portfolio of stocks and 25 % to risk-free bonds. You are currently young (say 30 years). If your human capital is worth $ 660 in present value terms and you have $ 248 in financial wealth, how much should you invest in stocks...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.32 % 16 % 0.8 B 10.40 16 1.3 C 12.06 16 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free...
Your human capital is risky and positively correlated with the overall performance of the stock market....
Your human capital is risky and positively correlated with the overall performance of the stock market. According to Modern Portfolio Theory, you have concluded that you should invest 75 % of your wealth to the optimal risky portfolio of stocks and 25 % to risk-free bonds. You are currently young (say 30 years). If your human capital is worth $ 602 in present value terms and you have $ 231 in financial wealth, how much should you invest in risk-free...
Which of the following statements about a portfolio is(are) correct A portfolio of two assets with...
Which of the following statements about a portfolio is(are) correct A portfolio of two assets with perfectly positively correlated returns will have an overall risk below that of the least risky asset B. A portfolio of two assets with perfectly negatively correlated
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.18% 15% 0.8 B 11.02    15    1.2 C 13.32    15    1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock=A, B, C. Expected Return=9.15 ,11.40, 13.65 Standard deviation:14%, 14, 14 Beta: 0.7, 1.2, 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is...
Which of the following statements is correct?(x)Adding stocks to your portfolio can reduce firm-specific risk, but...
Which of the following statements is correct?(x)Adding stocks to your portfolio can reduce firm-specific risk, but you will not eliminate market risk.(y)A low standard deviation means that the investment is less likely to achieve a much higher return than its average, but a low standard deviation indicates that the investment is less risky.(z)Expected returns may differ from actual returns because of an unforeseen economic expansion. A.(x), (y) and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(x) only A...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 10.10% 16% 0.9 B 11.01    16    1.1 C 13.28    16    1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.00% 16% 0.8 B 11.00    16    1.2 C 13.00    16    1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and...
Your client’s risky portfolio is fully invested in bonds which have a standard deviation of 13%....
Your client’s risky portfolio is fully invested in bonds which have a standard deviation of 13%. Is it possible that adding stocks, which have a standard deviation of 25%, could reduce the risk of the client’s overall risky portfolio? Explain your answer.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT