Question

For virtually all portfolios, the riskiness of the portfolio is a weighted average of the riskiness of the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset.

A. True
B. False

Answer 1

B) False

Step-by-step explanation:

The riskiness of a portfolio is less that the weighted average risk of its individual assets. Portfolio risk depends on two factors:

1. the average risk of the individual assets
2. correlation between the portfolio's assets

A diverse portfolio includes stocks that are negatively correlated, i.e. when one stock performs well, the other performs poorly.

E.g. stocks in oil producers vs. stocks in gold producers. When the economy is growing, oil producers gain high profits, when the economy is in recession, gold producers gain high profits.

Answer 2

B. False

Step-by-step explanation:

Portfolio risk is the probability of an asset owned within investment not meeting financial objectives. The risk of a portfolio is measured using the standard deviation of the portfolio. It is NOT the weighted average of the riskiness of individual assets in the portfolio. What standard deviation does is that it measures the volatility between a stock and stock average. That is the more a stock's returns vary from the stock's average return, the more volatile the stock.