Consider a Portfolio Comprised of Four Risky Securities

question 65

Multiple Choice

Consider a portfolio comprised of four risky securities.Assume the economy has three states with varying probabilities of occurrence.Which one of the following will guarantee that the portfolio variance will equal zero?

• A)The portfolio beta must be 1.0.
• B)The portfolio expected rate of return must be the same for each economic state.
• C)The portfolio risk premium must equal zero.
• D)The portfolio expected rate of return must equal the expected market rate of return.
• E)There must be equal probabilities that the state of the economy will be a boom or a bust.

---

Definitions:

Supply-Sider

An advocate or supporter of supply-side economics, a school of economic thought that emphasizes the benefits of making goods and services more available to consumers.

Expansionary Monetary Policy

To fight recessions, the Federal Reserve increases the money supply.

Rational Expectations Theory

An economic idea that posits individuals make predictions about future events based on their past experiences and available information, effectively using all available information to form expectations about economic variables.

Laffer Curve

A theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation, suggesting an optimal tax rate for maximizing revenue.