A Risky Security Has a Variance of

question 43

Multiple Choice

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

• A).51
• B).65
• C).72
• D).83
• E).85

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Definitions:

Market Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of holding a market portfolio.

Required Return

The minimum rate of return on an investment that investors expect or require to compensate for risks taken.

Beta

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).