The expected return of a two-fund portfolio: When the covariance between two fun
ID: 3072865 • Letter: T
Question
The expected return of a two-fund portfolio:
When the covariance between two funds is negative,
the portfolio risk can be lower than the risk of any of the individual funds.
the portfolio risk can be higher than the risk of any of the individual funds.
the portfolio expected return can be lower than the expected return of any of the individual funds.
the portfolio expected return can be higher than the expected return of any of the individual funds.
The expected return of a two-fund portfolio:
Answers: a. will always be lower than the expected return of each of the individual funds. b. will always be somewhere in between the expected return of each of the individual funds. c. will always be higher than the expected return of each of the individual funds. d. will always be higher than the expected return of each of the individual funds if the funds have a negative covariance. e. will always be lower than the expected return of each of the individual funds if the funds have a negative covariance. f. will always be somewhere in between the expected return of each of the individual funds if the funds have a negative covariance.When the covariance between two funds is negative,
a.the portfolio risk can be lower than the risk of any of the individual funds.
b.the portfolio risk can be higher than the risk of any of the individual funds.
c.the portfolio expected return can be lower than the expected return of any of the individual funds.
d.the portfolio expected return can be higher than the expected return of any of the individual funds.
Explanation / Answer
Solution
The expected return of a two-fund portfolio: d. will always be higher than the expected return of each
of the individual funds if the funds have a negative covariance
When the covariance between two funds is negative - a. the portfolio risk can be lower than the risk of any of the individual funds.
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