Asked by Rahaf Aldabain on Jul 07, 2024
Verified
You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's:
I. Expected return
II. Standard deviation
III. Correlation with your portfolio
A) I only
B) I and II only
C) I and III only
D) I, II, and III
Expected Return
The weighted average of all possible returns for an investment, with weights being the probabilities of each outcome.
Standard Deviation
A statistical measure of the dispersion of returns for a given security or market index, indicating how much returns can deviate from the average return.
Correlation
A statistical measure indicating the degree to which two variables' movements are associated with each other, ranging from -1 (perfect negative correlation) to 1 (perfect positive correlation).
- Understand the concept of risk and return in financial markets.
- Calculate the portfolio's standard deviation and beta, and provide an interpretation of these risk metrics.
- Understand the concept of correlation and its impact on portfolio risk.
Verified Answer
SG
Samantha GlaudeJul 11, 2024
Final Answer :
D
Explanation :
All three factors are important when considering adding a new security to a portfolio. Expected return helps determine the potential profitability of the investment, standard deviation measures the risk associated with the investment, and correlation with the existing portfolio can help determine how the new security will affect portfolio diversification. Therefore, it is best to consider all three factors before making a decision.
Learning Objectives
- Understand the concept of risk and return in financial markets.
- Calculate the portfolio's standard deviation and beta, and provide an interpretation of these risk metrics.
- Understand the concept of correlation and its impact on portfolio risk.