Question

Which one of the following statement is NOT correct? a)The risk of a complete portfolio decreases if you allocate more money to the risk-free asset. b)If you know the correlation parameter between rA and rB and their standard deviation measures, then you can also pin down the covariance between them. c)Suppose that assets A and B have positive covariance. Also, assets B and C have positive covariance. In this situation, assets A and C can have negative covariance. d)If you cannot take leverage nor short sell, the minimum variance of the portfolio of risky assets A and B is decreasing when correlation of A and B decreases. e)If covariance between assets A and B is greater than covariance between assets C and D, this always implies the magnitude of comovement is stronger for A and B than C and D.

Answer 1

The correct statement is option c) Suppose that assets A and B have positive covariance. Also, assets B and C have positive covariance. In this situation, assets A and C can have negative covariance.

Step-by-step explanation:

The correct statement is option c) Suppose that assets A and B have positive covariance. Also, assets B and C have positive covariance. In this situation, assets A and C can have negative covariance.

When two assets have positive covariance, it means they tend to move in the same direction. In this case, assets A and B have positive covariance, indicating that when the returns of asset A are high, so are the returns of asset B. Additionally, assets B and C have positive covariance, meaning that when the returns of asset B are high, the returns of asset C also tend to be high.

Since both assets A and B have a positive covariance with asset C, it is not possible for assets A and C to have negative covariance. If asset A and asset B move in the same direction (positive covariance) and both have positive covariance with asset C, assets A and C must also have a positive covariance.