Question

A.
which of the following statements is correct? 1.possible sources of market or none diversifiable risk include inflation and commodity price changes, changes in currency exchange rates, and fluctuations in interest rates
2.the practice of a diversification can effectively reduce and investors company-specific risk
3. non-systematic risk reflects the risk that remains after an investor has diversified his or her portfolio

B
the phenomena and behavior discussed above are based on the assumption that the majority of investors are risk-averse. according to the concept of risk aversion...
1.an investor will assess the riskiness of a security and then determine his or her appropriate rate of return or a risk-averse investor will prefer an investment that offers a 7% return with a standard deviation of 2% on an alternative investment that offers 7% return with a standard deviation of 4%

C.
which statement is correct
1. .the addition of an asset to a portfolio, when the correlation coefficient between the assets and the portfolio's return is -1, will increase the riskiness of the portfolio
2.. it is theoretically possible to create a portfolio that offers a positive return and whose standard deviation is 0
3. the addition of an asset to a portfolio, when the correlation coefficient between the assets and the portfolio's returns is +1, will reduce the riskiness of the portfolio
4. it is theoretically impossible to create a portfolio that offers a positive return and a standard deviation of 0

D. how is it possible that an asset held in a portfolio can produce less total risk than the same asset held in isolation?

1. it is not possible for a portfolio to exhibit less total risk than the sum of the riskiness exhibited but each of the assets in the portfolio

2.when an asset is held as part of a portfolio it is possible that the pattern of variation in its returns may be offset and averaged out by another asset in the portfolio this would reduce the total variation of risk exhibited by the portfolio even though the behavior of the assets returns did not change

Answer 1

Answer for A is 3 non-systematic risk reflects the risk that remains after an investor has diversified his or her portfolio. Reason: Non-systematic risk is fundamental risk associated with the company which includes (but not limited to) company financials, management personnel, sudden demise or leave of management personnel, company's sudden changes in policies etc. This risk denotes something that is particular to one company and can't be diversified. Only systematic risk (represented by Beta) can be diversified with the help of creating a portfolio consisting of many different assets.

Answer for B : Other options are missing.: Although option 1 is correct. Risk aversion means an investor wants maximum return at minimum risk. In other more detailed words, an investor prefers the maximum level of return for a given risk or least possible risk for a given level of return.

Answer for C is 2: it is theoretically possible to create a portfolio that offers a positive return and whose standard deviation is 0. Reason: Option 1 is incorrect as adding an asset whose correlation coefficient with the portfolio is -1 will reduce the risk. As this asset will go in the opposite direction with respect to the portfolio. So if portfolio loses 10%, then this asset will gain 10%, which in turn will reduce the overall risk in the portfolio. Option 3 is incorrect, because adding an asset whose correlation coefficient with the portfolio is +1 will increase the risk. As this asset will go in the same direction with respect to the portfolio. So if portfolio loses 10%, then this asset will also lose 10%, which in turn will make the overall portfolio more volatile.

Answer for D is 2: when an asset is held as part of a portfolio it is possible that the pattern of variation in its returns may be offset and averaged out by another asset in the portfolio this would reduce the total variation of risk exhibited by the portfolio even though the behavior of the assets returns did not change. Reason: Being part of a portfolio, an asset's total return is offset by movement in other assets, so it is possible that if others are losing money, then this asset may be gaining or when the overall portfolio is making money, then this may be losing. So even when the asset is true to its characteristic but when it is part of large portfolio then its return is averaged out by another assets in the portfolio.

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