Asked by Laken Guzic on Jun 23, 2024
Verified
The standard deviation of a two-asset portfolio is a linear function of the assets' weights when
A) the assets have a correlation coefficient less than zero.
B) the assets have a correlation coefficient equal to zero.
C) the assets have a correlation coefficient greater than zero.
D) the assets have a correlation coefficient equal to one.
E) the assets have a correlation coefficient less than one.
Correlation Coefficient
A statistical measure that calculates the strength and direction of the relationship between two variables, ranging from -1 to 1.
Standard Deviation
A statistical measure that quantifies the variation or dispersion of a set of data points, often used to assess the volatility of an investment.
- Understand the effect of diversification on the risk associated with a portfolio.
Verified Answer
AC
Asinate ColatiJun 24, 2024
Final Answer :
D
Explanation :
The standard deviation of a two-asset portfolio becomes a linear function of the assets' weights only when the assets have a correlation coefficient equal to one. This is because, at a correlation of one, the assets move perfectly together, making the portfolio's risk (standard deviation) a simple weighted average of the individual assets' risks.
Learning Objectives
- Understand the effect of diversification on the risk associated with a portfolio.
Related questions
As the Number of Securities in a Portfolio Is Increased ...
A Portfolio Is Composed of Two Stocks, a and B ...
Portfolio Theory as Described by Markowitz Is Most Concerned with ...
Which Statement About Portfolio Diversification Is Correct ...
Which Type of Correlation Will a Completely Diversified Portfolio Have ...