How to construct a risk-free portfolio using two assets? Find two assets with correlation between them...
- How to construct a risk-free portfolio using two assets?
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Find two assets with correlation between them equal to -1 |
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Find two assets with correlation between them equal to 1 |
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Find two assets with correlation between them bigger than 0 but smaller than 1 |
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Find two assets with correlation between them bigger than -1 but smaller than 0 |
- Stock A and B are identical in terms of their expected cash flows. Investors like stock A more than stock B today for reasons unrelated to expected cash flows. They should pay ______ price today to buy A than to buy B. As a result, stock A is expected to have _______ expected return than stock B.
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Lower, Lower |
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Higher; Lower |
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Higher; Higher |
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Lower, Higher |
- What risk is likely to particularly explain the pattern of small firm effects?
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Recession risk |
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Large firms are overvalued |
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Firm specific risk |
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Small firms are subject to more behavioral errors from traders |
- Decreasing the number of stocks in a portfolio from almost infinite number of stocks to just 10 stocks would likely ________________.
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increase the return of the portfolio |
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decrease the variation in returns the investor faces in any one year |
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increase the systematic risk of the portfolio |
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increase the unsystematic risk of the portfolio |
Homework Answers
1)
A portfolio having two stocks with correlation -1 between them will be a risk-free portfolio.
Hence, correct option is “Find two assets with correlation between them equal to -1”
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How to construct a risk-free portfolio using two assets?
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