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Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities?I) The higher 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 degree to which the portfolio variance is reduced depends on the degree of correlation between securities.
A) I only
B) II only
C) III only
D) I and II
E) I and III
Portfolio Variance
A measure of the dispersion of returns of a portfolio, calculated as the weighted average of the covariance of each asset in the portfolio.
Coefficient of Correlation
A statistical measure that indicates the degree to which two variables move in relation to each other, ranging from -1 to 1.
Linear Relationship
A direct relationship between two variables where a change in one variable is directly proportional to a change in the other.
- Comprehend the computation and consequences of portfolio variance.
- Understand the role of correlation and covariance in portfolio risk reduction and optimization.
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Learning Objectives
- Comprehend the computation and consequences of portfolio variance.
- Understand the role of correlation and covariance in portfolio risk reduction and optimization.
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