With respect to the risk / return graph: why is the shape of the graph a...

With respect to the risk / return graph: why is the shape of the graph a curve when the correlation is between -1 and 1? Why is it a straight line in the other two cases?
What happens to portfolio risk as you invest in more than one asset?
What happens to portfolio risk as the number of assets increase?

Solutions

Expert Solution

When the correlation of two stocks will be -1, it will mean that those two stocks are perfectly negatively correlated and they will move in the opposite direction so show the shape of the graph is straight line.

Similarly when the correlation of two stock would be +1, it would mean that they are perfectly positively correlated, and they will move in the same direction so, shape of the graph is straight line.

When the correlation is between -1 and + 1, it would mean that the correlation is not perfectly correlated, so they will be in a shape of curve because they cannot be straight line as their movement would not be completely similar or completely opposite.

If there is just one asset, then the risk will be very high because all the risk will be related to the movement of one asset, but if the number of the Asset will increase there would be diversification benefit and the risk will decrease.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Compare stocks and bonds with respect to risk and return.

Explain the four moments with respect to investing and specifically, to risk-return. How does this link to...

Explain the four moments with respect to investing and specifically, to risk-return. How does this link to normality assumptions? What information does each contain?

1.Explain the four moments with respect to investing and specifically, to risk-return. How does this link...

1.Explain the four moments with respect to investing and specifically, to risk-return. How does this link to normality assumptions? What information does each contain?

how are risk and return related? why is some risk diversifiable and some risk non diversifiable?...

how are risk and return related? why is some risk diversifiable and some risk non diversifiable? how do you eliminate as much risk as possible from your investment portfolio?

Describe risk-return tradeoff and why it is important to financial managers.

Why don’t shareholders always share the views of firm managers with respect to foreign exchange risk...

Why don’t shareholders always share the views of firm managers with respect to foreign exchange risk management? What are the implications of such disagreement and what would you recommend in order to alleviate it?

Why is Beta the correct measure of risk and why do you get more return when...

Why is Beta the correct measure of risk and why do you get more return when you can just diversify? Why do you get greater returns by bearing a greater risk when it comes to Beta stocks? What are the main criticisms of Effecient Market hypothesis? How can you take advantage of these criticism? How does it justify its claim and show evidence that doesnt support the capital asset pricing model?

why the shape of rainbow is parabolic?

With respect to risk response strategies, which of the following would be a “risk sharing” approach?...

With respect to risk response strategies, which of the following would be a “risk sharing” approach? XYZ company enters the market as a provider of car insurance to high credit risk clients; however, they diversify their portfolio by targeting 40% of their marketing efforts to traditional “safe credit” customers. LGW Communications employs a series of manual and automated controls to manage inventory shrinkage (inventory going missing due to damage or theft) in an effort to keep inventory costs in line...

Answer the following with respect to the graph below: (2 marks each) a) What is the...

Answer the following with respect to the graph below: (2 marks each) a) What is the level of desired investment expenditure (I) and government purchases (G)? b) What is the autonomous portion of consumption? What is total autonomous expenditure? c) Starting from equilibrium national income of $250 billion, suppose government purchases decreased by $25 billion. Describe the effects on the AE curve and on equilibrium national income. d) Starting from equilibrium national income of $250 billion, suppose the net tax...

Subjects