Suppose You Own a Two-Security Portfolio

question 92

Multiple Choice

Suppose you own a two-security portfolio.You have 25 percent of your funds invested in Security A and the balance of your funds invested in Security B.Security A has a standard deviation of 8 percent and Security B has a standard deviation of 12 percent.What is the covariance of the returns on Securities A and B if the portfolio standard deviation is 10 percent?

• A) 0.0040
• B) 0.0093
• C) 0.0147
• D) 0.0258

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Definitions:

Risk Factor

An element or variable that increases the likelihood of a negative outcome, such as financial loss or failure.

Unsystematic Risk

The risk tied to a specific company or industry that can be minimized through diversification, unlike market-wide systemic risk.

Systematic Risk

The inherent risk associated with the entire market or market segment, also known as market risk, which cannot be diversified away.

Standard Deviation

A statistical measure of the dispersion or variability of a set of data points, indicating how much the individual data points diverge from the mean value of the data set.