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The DEAR of a portfolio which consists of three different assets A, B and C is...

The DEAR of a portfolio which consists of three different assets A, B and C is the sum of the individual assets’ DEARs. i.e, Portfolio’s DEAR = DEARA + DEARB+ DEARC. Is this statement true or false? Please explain to get full credit.

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Answer #1

No, The DEAR of a portfolio which consists of three different assets A, B and C is not the sum of the individual assets’ DEARs. i.e, Portfolio’s DEAR = DEARA + DEARB+ DEARC. So the statement is false.

To find DEAR of a portfolio, we cannot simply sum up individual DEARs to find aggregate portfolio risk.

DEAR of a portfolio is

71/2 DEAR portfolio = [DEAR,? + DEAR,’ + DEAR? + 2 Pab DEAR, * DEAR+ 2Pac *DEAR, DEAR + 2Pbc * DEAR*DEAR]

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