Question

Assume that a risk-averse investor who owns shares in Minta Company decides to add shares of...

Assume that a risk-averse investor who owns shares in Minta Company decides to add shares of either Miller Ltd or Mistra Ltd to create a two-security portfolio. The expected return and standard deviation are the same for all three shares. The correlation of returns between Minta and Miller is -0.06; while, the correlation of returns between Minta and Mistra is +0.06.

Which of the following statements is/are true? Explain why.

(i) Portfolio risk is expected to decline more when the investor buys Miller shares.

(ii) Portfolio risk is expected to decline more when the investor buys Mistra shares.

(iii) Portfolio risk is expected to increase when either Miller or Mistra shares are bought.

(iv) Portfolio risk is expected to either decrease or increase because it depends on various other factors.

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Answer #1

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