Which One of the Following Statements Is Correct Concerning a Portfolio

question 88

Multiple Choice

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

• A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
• B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
• C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
• D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
• E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

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Definitions:

Book Value

The net value of a company's assets minus its liabilities and intangible assets, as shown in the financial statements.

Original Partners

The initial members who form a partnership by agreeing to share the responsibilities and profits of a business.

Information Tax Return

A type of tax document used to report various types of income, other than wages, salaries, and tips, to governmental tax agencies.

Accounting Entity

An economic unit with clearly defined boundaries for which financial transactions are recorded, separate from its owners or other business units.