As one adds more assets to aportfolio in order to achievediversification, what will happen tothe portfolio's risk?OA. The risk will decline asdiversifiable risk is reduced to zero,after which non-diversifiable risk willremain and the riskiness of theportfolio will stabilize.B. It will decline until eventuallyall risk is eliminated.C. It will increase, as the additionof riskier and riskier assets will causeoverall portfolio risk to rise.O D. It will remain the samethroughout the process, as overallportfolio risk is relatively stable.

Diversification is a process in which investors add more assets which are not well correlated to…

As one adds more assets to a portfolio in order to achieve diversification, the portfolio's risk? O A. The risk will decline as diversifiable risk is reduced to zero, after which non-diversifiable risk will remain and the riskiness of the portfolio will stabilize. what will happen to OB. It will decline until eventually all risk is eliminated. OC. It will increase, as the addition of riskier and riskier assets will cause overall portfolio risk to rise. D. It will remain the same throughout the process, as overall portfolio risk is relatively stable.

As one adds more assets to a portfolio in order to achieve diversification, the portfolio's risk? O A. The risk will decline as diversifiable risk is reduced to zero, after which non-diversifiable risk will remain and the riskiness of the portfolio will stabilize. what will happen to OB. It will decline until eventually all risk is eliminated. OC. It will increase, as the addition of riskier and riskier assets will cause overall portfolio risk to rise. D. It will remain the same throughout the process, as overall portfolio risk is relatively stable.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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As one adds more assets to a portfolio in order to achieve diversification, what will happen to the portfolio’s risk?
Finance Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that: Group of answer choices decreases to a level below that of either asset. remains unchanged. increases to a level above that of either asset. stabilises to a level between the asset with the higher risk and the asset with the lower risk.
Indicate whether its True or False. Then write the explanation! In the presence of diversification benefits, when we combine two assets together into a portfolio, the systematic risk of the portfolio will be less than the weighted average systematic risk of the individual assets in the portfolio.
When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will a. Increase the expected return and standard deviation of the portfolio b. Increase the standard deviation of the portfolio c. Decrease the standard deviation of the portfolio d. Increase the expected return of the portfolio
Suppose you have an investment portfolio with fraction x invested in a market portfolio and (1-x) in a risk- free asset. Increasing fraction x invested in the market portfolio and consequently decreasing (1-x) invested in the risk-free asset shall (select any correct answer, if there are multiple correct answers) Select one or more: O decrease the Sharpe ratio of the resulting portfolio O decrease the expected return of the resulting portfolio increase the Sharpe ratio of the resulting portfolio increase the expected return of the resulting portfolio Dincrease the risk of the resulting portfolio
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.
The goal of immunization is to A. make the effective duration of the portfolio zero В. generate a return in excess of the benchmark using factor mismatches C. earn a pre-determined return, over a specified time horizon, irrespective of interest rate changes D. provide funding of a future liability from coupon and matured principal flows
If you introduce a risk free asset in your portfolio of risky assets; how will this change the shape of the opportunity? What are the main implications with respect to portfolio theory?
Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph (
Question 2 a) Plot the Security Market Line (SML).b) Superimpose the CAPM’s required return on the SML.c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph
An increase in investor risk aversion would be expected to: Increase the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Increase the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. There is not enough information to determine how the Risk-Free Rate and Expected Return on the Market Portfolio will change. None of the above answers is correct.

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