Suppose you identify 50 possible investments whose payoffs are completely independent of one another. All the investments have the same expected value and standard deviation. You have $5,000 to invest. In terms of risk, would the benefit of spreading your $5,000 across all 50 investments be the same, greater, or smaller compared with dividing your funds between just two investments? OYes. The gains from spreading your investments would be larger if you spread the $5,000 across 50 investments. No. Because in this case diversification does not help to spread risk, it doesn't matter how many investments you spread your $5,000 across. No. Because the payoffs from these investments are independent, it doesn't matter how many investments you spread your $5,000 across, as there is no benefit in terms of reduced risk. O Yes. Becouse the payoffs from these investments are negatively correlated with one another, spreading your $5.000 across a larger number of investments reduces your risk.
Suppose you identify 50 possible investments whose payoffs are completely independent of one another. All the investments have the same expected value and standard deviation. You have $5,000 to invest. In terms of risk, would the benefit of spreading your $5,000 across all 50 investments be the same, greater, or smaller compared with dividing your funds between just two investments? OYes. The gains from spreading your investments would be larger if you spread the $5,000 across 50 investments. No. Because in this case diversification does not help to spread risk, it doesn't matter how many investments you spread your $5,000 across. No. Because the payoffs from these investments are independent, it doesn't matter how many investments you spread your $5,000 across, as there is no benefit in terms of reduced risk. O Yes. Becouse the payoffs from these investments are negatively correlated with one another, spreading your $5.000 across a larger number of investments reduces your risk.
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.2IP
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