Asked by Jayna Vicary on Jun 26, 2024
Verified
Modern portfolio theory suggests that:
A) it is always wise to create a stock portfolio that captures a high average rate of return.
B) the higher the expected return, the higher the portfolio's risk.
C) it is always wise to create a stock portfolio consisting of similar stocks.
D) a riskless portfolio is always the wisest alternative.
Modern Portfolio Theory
An investment theory that shows how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk.
Expected Return
The forecasted profit or loss from an investment, considering all possible outcomes and their probabilities.
- Recognize the relationship between risk and return in financial markets.
Verified Answer
MM
Mathis MazurekJun 28, 2024
Final Answer :
B
Explanation :
Modern portfolio theory suggests that there is a positive relationship between risk and expected return. This means that the higher the expected return, the higher the portfolio's risk. The theory also suggests that diversification can help manage risk by combining assets that are not perfectly correlated, which can reduce overall portfolio risk without sacrificing returns. Therefore, it is not always wise to create a stock portfolio consisting of similar stocks (C) or to create a riskless portfolio (D). While capturing a high average rate of return may be desirable, it must be balanced with the level of risk the investor is willing to take on (A).
Learning Objectives
- Recognize the relationship between risk and return in financial markets.
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