Question

Which of the following statements is FALSE regarding the risk of a portfolio comprised of two risky securities A & B?

a) If the correlation between A & B is +1, the risk of the portfolio comprising A &B is simply the weighted average of the volatilities of A & B.

b) The risk of a portfolio comprising A & B can be less than the risk of either A or B

c) If the correlation between A & B is -1, a risk-free portfolio A & b can be constructed that would have an expected return equal t the risk-free rate.

d) The covariance of the portfolio comprising of A & B = Variance (A) + Variance (B) + Correlation (A&B) e) All else equal, the higher the correlation between A & B, the higher the portfolio risk.

Answer 1

3 a) 4 5 b) 7 C) 8 9 Standard deviation = (w1^2*01^2+w2^2*62^2+2*w1*w2*1*62*p)^0.5 Statement a is False If correleation is 1, then standard deviation of portfolio is (w1^2*01^2+w2^2*o2^2+2"w1"w2*81*o2)^0.5 Statement bis true if the correlation between the return of A and B is negative, then the portfolio risk can be less than either A or B Statement C is true If the correlation between A & B is -1, a risk-free portfolio A & b can be constructed that would have an expected return equal to the risk-free rate. If correleation is -1, then standard deviation of portfolio is (w1^2*61^2+w2^2*o2^2-2*w1*w2*1*62)^0.5 portfolio return = w1*R1+w2*R2 Statement D is true Higher correlation between A &B, the higher the portfolio risk