Asked by Thais De Charentenay on Jun 27, 2024
Verified
What does portfolio effect mean in investment decisions?
A) the degree of correlation between various assets
B) the level of independence between asset returns
C) the relationship between assets and market movements
D) the risk-adjusted discount rates
Portfolio Effect
The impact of diversifying investments across different assets, which can reduce risk without proportionately lowering expected returns.
Investment Decisions
Choices made by individuals or firms regarding the allocation of resources to different assets or projects with the expectation of earning a return.
Correlation
A numerical indicator that captures how much two variables move in tandem, showing both how strong their linkage is and in what direction it lies.
- Employ the strategies of diversifying a portfolio to acknowledge its role in risk mitigation.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
A
Explanation :
Portfolio effect refers to the impact of the correlation between various assets on the overall risk and return of the portfolio. A higher degree of correlation between assets can lead to a higher degree of risk in the portfolio, while a lower degree of correlation can lead to diversification and reduced risk. Therefore, the degree of correlation between various assets is significant in investment decisions.
Learning Objectives
- Employ the strategies of diversifying a portfolio to acknowledge its role in risk mitigation.