Question

98) Which of the following statements is FALSE A) The volatility declines as the number of stocks in a portfolio grows. B) An equally weighted portfolio is a porfolio in which the same amount is invested in eadh stock C) As the number of stocks in a portfolio grows large, the variance of the portfolio is determined primarily by the average covariance among the stocks D) When combining stocks into a portfolio that puts positive weight on each stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks. 99) Which of the following statements is FAISE A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in an efficient portfolio C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns 100) Which of the following statements is FALSE? A) Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. B) To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented C) We say a portfolio is short those stocks that have negative portfolio weights. D) Adding new investment opportunities allows for greater diversification and improves the efficient frontier.

Answer 1

98) A) The volatility declines at the number of stocks in the portfolio grows

Volatility of portfolio depend on the correlation between stocks and individual stock variance. Lower the correlation between stocks lower the portfolio variance. If the stocks with higher correlation with the existing portfolio are added, then it will lead to increase in portfolio variance

99) B) Investor seeking high return and low volatility should invest in the efficient market

Efficient market says that it is impossible to generate the positive return on ongoing basis as stock price already reflects available information.

100) B) to arrive at best possible risk and return, we should keep adding the stocks until all the investment opportunities are evaluated

To arrive at best possible risk and return for the portfolio, we should add those which offers higher return for low risk