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Which of the following statements is (are) false regarding the risk of a portfolio of two risky securities A & B? A. The co-variance of A&B equals the volatility A plus volatility B plus the correlation between A&B B. If the correlation between A & B is -1, a risk free portfolio comprising A &B can be constructed that would have an expected return equal to the risk free rate C. The risk of a portfolio comprising A & B can be less than the risk of either A or B D. If the correlation between A & B is +1, the volatility of the portfolio comprising A & B is simply the weighted average of the volatilities of A & B E. The higher the correlation between A & B, the lower the reduction in portfolio risk.

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Answer #1

Answer )

A) False. Covariance A& B equals Correlation between A& B multiplied by st. deviations of A and B indiviually.

B) False

C) True. the risk of the portfolio can be less then the indiviual risk of A & B depending on the corellation between A&B.If it is negative then the portfolio risk can be less.

D) False. The formulae for Portfolio st. deviation has to be applied.

E) True. Lower the corellation between A&B , higher the reduction in portfolio risk.

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