Read the following 5 statements and decide which of them are TRUE: Select one or more:...

Read the following 5 statements and decide which of them are TRUE: Select one or more: a. An asset is preferred by investors, if it has a higher return compared to another asset, even if the risk is also higher. b. The covariance as well as correlation measure the statistical relationship between two variables and are both symmetric. c. The contribution of an individual asset to the expected return of a portfolio is purely given by the expected return of the individual asset and its portfolio weight. d. The describing parameters of a normal distribution are the mean and the standard deviation. e. When investors evaluate the risk of multiple assets in a portfolio, it is sufficient to look at the individual risk of each asset.

Solutions

Expert Solution

a. An asset is preferred by investors, if it has a higher return compared to another asset, even if the risk is also higher.

No. An Investor always wants maximum returns with minimum risk. Thus any investor would like to see the risk/reward ratio to make an investment.

b. The covariance as well as correlation measure the statistical relationship between two variables and are both symmetric.

Yes.

c.The contribution of an individual asset to the expected return of a portfolio is purely given by the expected return of the individual asset and its portfolio weight.

Yes

d. The describing parameters of a normal distribution are the mean and the standard deviation.

Yes

e.When investors evaluate the risk of multiple assets in a portfolio, it is sufficient to look at the individual risk of each asset.

No. When investors evaluate the risk of a portfolio it is important to look at the risk of portfolio as whole and also permutations and combinations of assets is done to lower the risk of portfolio.

jeff jeffy answered 1 year ago

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