Question
In: Finance
18 Which of the following statements is most correct? The variance of a portfolio is a...
18
Which of the following statements is most correct?
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The variance of a portfolio is a weighted average of asset variances. |
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The benefits of diversification are greatest when asset returns have zero correlations. |
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The market portfolio truly eliminates all unsystematic risk. |
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Beta is the measure of an asset’s unsystematic risk. |
Solutions
Expert Solution
Correct Option : The market portfolio truly eliminates all unsystematic risk
Each option is explained in detail below:
Explanation:
Option 1: The variance of a portfolio is not the weighted average of asset variances - False
Varaince of the portfolio is given by:
σP2 = w22σ12 + w22*σ22 + 2*w1*w2*ρ*σ1*σ2
Clearly Variance of the portfolio is not weighted average of asset variances
Option 2: The benefits of diversification are greatest when asset returns have zero correlations - False
The benefits of diversification are greatest when asset return have negative correlations as it will reduce the overall variance and hence standard deviation
Option 3: The market portfolio truly eliminates all unsystematic risk. - True
Market portfolio consists of stocks from different industries and hence Market portfolio eliminates firm-specific risk or unsystematic risk
This statement is Correct
Option4: Beta is the measure of an asset’s unsystematic risk - False
Beta is a measure of market risk for a firm as it measures the volatility of a stock with respect to the market
jeff jeffy answered 3 months agoRelated Solutions
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