Assume That You Own a Portfolio with a Known Average

question 150

Multiple Choice

Assume that you own a portfolio with a known average return and standard deviation. Which of the following stocks, if added to your portfolio, will not reduce its risk through diversification?

• A)A stock whose return is negatively correlated with that of your portfolio and has a lower standard deviation.
• B)A stock whose return is positively correlated with that of your portfolio and has a lower standard deviation.
• C)A stock whose return is positively correlated with that of your portfolio and has a higher standard deviation than your stock.
• D)All of the above will reduce the risk of your investment through diversification.
• E)None of the above will reduce the risk of your investment through diversification.

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Definitions:

Circular Flow Diagram

The circular flow diagram is an economic model that shows how money moves through an economy between producers and consumers, illustrating the continuous flow of goods and services and financial transactions.

Revenue

The income that an organization receives from its normal business activities, usually from the sale of goods and services.

Insurance

A contractual arrangement providing financial protection against losses or damages from specific risks, in exchange for premium payments.

Tolerance for Risk

is the degree to which an individual, investor, or organization is willing to endure uncertainty and potential losses in pursuit of potential gains.