4. An nvestor forms a portfolio out of two risky assets. The correlation coeffic

Question

4. An nvestor forms a portfolio out of two risky assets. The correlation coefficient between these two assets is 1. Which of the following statements is true? A. There are diversification benefits: the portfolio standard deviation is lower than the weighted average standard deviations of the two risky assets. B. There are no diversification benefits: the portfolio standard deviation is higher than the weighted average standard deviations of the two risky assets. C. There are no diversification benefits: the portfolio standard deviation is the same as the weighted average standard deviations of the two risky assets. D. There are diversification benefits: the portfolio standard deviation is higher than the weighted average standard deviations of the two risky assets 5. Which of the following statements is true regarding the asset allocation problem? A. The optimal risky portfolio has the smallest standard deviation. B. The optimal risky portfolio has the highest expected return. C. The optimal risky portfolio has the highest Sharpe ratio. D. All investors will put 100% of their portfolio wealth in the optimal risky portfolio.

Explanation / Answer

4) There are no diversification benefits As the portfolio standard deviation is same as the weighted average standard deviation of the two risk assets. As the correlation coefficient between two risk assets is perfectly 1, if asset value changes the asset value also will change to the same extent

5) A) The optimal risky portfolio has the smallest standard deviation.

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