Question

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

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Answer #1

FALSE: A portfolio of two assets with perfectly positively correlated returns will have an overall risk below that of the least risky asset.

REASON:

A portfolio of two assets with perfectly positively correlated returns will have a weighted average risk Wa*Sd(a)+Wa*Sd(b) (which lies in between the risk of the two assets).


TRUE:
A portfolio of two assets with perfectly negatively correlated will have an overall risk below that of the least risky asset.

REASON: A portfolio of two assets with perfectly positively correlated returns will have a standard deviation = Wa*Sd(a)-Wa*Sd(b)

Portfolio standard deviation will be below due to the negative sign in the equation above.

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