Question

Two stocks can be combined to form a riskless portfolio if the correlation of -1.0. Risk is not reduced at all if the two stocks have correlation of +1.0. In general, stocks have correlation less than 1.0, so the risk is lowered but not completely eliminated.

True or False

Using a regression to estimate beta, we run a regression with returns on the stock in question plotted on the Y axis and returns on the market portfolio plotted on the X axis. The intercept of the regression line, which measures relative volatility, is defined as the stock’s beta coefficient, or b.

True/False

Answer 1

1. False

As correlation of -1 have no effect on expected return but will reduce volatility of portfolio but that doesn't mean that portfolio will be risk free. We still have risk in the portfolio specially specific risk.

2. False

The intercept of regression line on y axis explains the location of regression line on Y axis when x is 0 which is denoted by alpha. Beta represents slope of regression line means it will explain that a change in explainatory variable will create a unit change on response variable.