Question

Which of the following statement(s) is (are) true regarding the variance/standard deviation of a portfolio of two risky securities? I. The lower the coefficient of correlation between securities, the greater the reduction in the portfolio variance. II. There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. III. The standard deviation of the portfolio decreases at an increasing rate as more stocks are added to the portfolio

Answer 1

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

Step-by-step explanation:

The variance of a portfolio of 2 risky assets can be equal to zero if the association or connection between the two securities is equal to minus one likewise the investment opportunity set of 2 risky assets shows that all risk-return is an association or combinations of any portfolio of the two securities.

The variance of a portfolio of risky securities is usually said to be the weighted sum of the securities' variances and covariances.

The standard deviation of a portfolio of risky securities is commonly defined as the square root of the weighted sum of the securities' variances and covariances.

The expected return of a portfolio of risky securities is said to be a weighted average of the securities' returns.