Question

You are a risk averse investor. You are willing to add an investment with high volatility...

You are a risk averse investor. You are willing to add an investment with high volatility provided the correlation coefficient of this investment with other stocks in the portfolio is not less than +1.

True

False

10 points   

The stock A has 25% standard deviation on its expected return and the stock B has 25% standard deviation on its expected return. The expected return for the portfolio of these two stocks will have a standard deviation of 25%.

True

False

If two stock have zero correlation, then the various combination of portfolio of these two stocks will no help to lower the risk.

True

False

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Answer #1

Answer for 1st question will be false because as a risk averse investor one will try to find stock which is negative correlated to portfolio in that way he can reduce the risk of the portfolio.

Ans for 2nd question is false because portfolio will have less than 25% as a standard deviation. Only way it can have 25% of standard deviation when portfolio has one stock as 100% and other as zero.

Answer for 3rd question is again false because one can lower the risk by assigning more weight to less risky asset in this portfolio. There can be many combinations of risk profile even if the correlation between two stocks is zero.

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