What are the answers to these set of problems The risk of a

What are the answers to these set of problems?

The risk of a portfolio is: [select all that are true to get credit is reduced considerably if the assets included in the portfolio have a large correlation (i.e. close to +1) Could be measured by the CAPM beta could be measured by standard deviation could be measured by expected returns is reduced considerably if the assets included in the portfolio have a low or negative correlation (i.e. close to -1)

Solution

1.

Risk or a portfolio is measured in term of standard deviation and Beta. Beta measures systematic risk and standard deviation measure unsystematic risk. in diversification process, if correlation between assets in portfolio is -1, the risk of portfolio that is standard deviation reduce significantly.

Option (B) (C) and (E) is correct answer.

2.

If beta of your portfolio is 2 which is too high according to your tolerance level then you should Invest stock with high beta and invest the proceed in risk free securities like T bill. You can also sell stock with highest beta and invest proceed in market portfolio or You can sell investment that follow market and sell in t bill. other way to reduce risk is Holding cash.

Option (B) (C), (D) and (E) is correct answer.

if market are in equilibrium, then two assets with different betas would produce different returns; one with higher beta will have higher return and one with lower beta will have lower return. Suppose you must invest in only in risky assets and you wanted to maximize your returns, if you are expecting the market to produce positive return, they should invest in assets with large betas.

Option (B) and (C) is correct answer.