Optimal Risky Portfolios

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?

D. It decreases at a decreasing rate.-

Which of the following statement(s) is (are) true regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors and investors will choose the portfolio that maximizes their expected utility. All rational investors select the portfolio that maximizes their expected utility; for investors who are relatively more risk-averse, doing so means investing less in the optimal risky portfolio and more in the risk-free asset.

Which of the following statements is (are) true regarding the variance of a portfolio of two risky securities?

The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

The separation property refers to the conclusion that

The determination of the optimal risky portfolio is purely technical and can be done by a manager. The complete portfolio, which consists of the optimal risky portfolio and the risk-free asset, must be chosen by each investor based on preferences.

Which of the following statements is (are) false regarding the variance of a portfolio of two risky securities? A. The higher

The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance and there is a linear relationship between the securities' coefficient of correlation and the portfolio variance. E. The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance

The individual investor's optimal portfolio is designated by:

The point of tangency with the indifference curve and the capital allocation line.

The expected return of a portfolio of risky securities

is a weighted average of the securities' returns.

The variance of a portfolio of risky securities

is the weighted sum of the securities' variances and covariances.

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

portfolio opportunity set

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio

portfolio standard deviation will be less than the weighted average of the individual security standard deviations.

Other things equal, diversification is most effective when

securities' returns are negatively correlated.

In words, the covariance considers the probability of each scenario happening and the interaction between

securities' returns relative to their mean returns.

Weight of Asset Ain global minimum variance portfolio

standard deviation of B/ standard deviation of A *Standard deviation of b

The Capital Allocation Line provided by a risk-free security and N risky securities is

the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

The efficient frontier of risky assets is

the portion of the investment opportunity set that lies above the global minimum variance portfolio.