We Can Reduce Volatility by Investing in Less Than Perfectly

question 13

Multiple Choice

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________.

• A)is higher than the weighted average volatility
• B)is independent of weights in the stocks
• C)is less than the weighted average volatility
• D)depends on the expected return

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Definitions:

Beta

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

Diversifiable Risk

A type of investment risk that can be reduced or eliminated through diversification, including risks specific to an industry, company, or region.

Unsystematic Risk

The risk that is specific to a company or industry, which can be reduced through diversification.

Individual Investor

An individual investor is a non-professional private investor who buys and sells securities for their personal account.