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Which of the following statement(s) is(are) true 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, indicating the degree of investment risk.
Coefficient of Correlation
A statistical measure that calculates the strength and direction of a linear relationship between two variables, ranging from -1 to 1.
Risky Securities
Risky securities are investment products that come with a higher degree of uncertainty regarding their future value or return, often offering potentially higher rewards to compensate for the increased risk.
- Acquire knowledge on the significance of correlation and covariance in the diminution of risk and the optimization of a portfolio.
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Learning Objectives
- Acquire knowledge on the significance of correlation and covariance in the diminution of risk and the optimization of a portfolio.
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