Which One of the Following Statements Is Correct Concerning a Portfolio

question 88

Multiple Choice

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

• A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
• B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
• C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
• D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
• E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

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Definitions:

Economic Profits

The profit a company makes after accounting for both the explicit costs of production and the opportunity costs of capital.

Long Run

A period in which all factors of production and costs are variable, typically allowing for full adjustment to changes.

Market Equilibrium

A situation in which the quantity of goods or services supplied is equal to the quantity demanded, leading to no pressure for price to change.

Economic Profits

Profits calculated by subtracting both explicit and implicit costs from total revenue, showing the total return exceeding all opportunity costs.