1.2 Problem 1: Answer with a clear true/false, and provide a detailed explanation to substantiate your answer: For the diversification effect to kick in, one needs negatively correlated assets in the portfolio.
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1.2
Problem 1: Answer with a clear true/false, and provide a detailed explanation to substantiate your answer:
-
For the diversification effect to kick in, one needs negatively correlated assets in the portfolio.
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- Question # 3. Markowitz theory indicates to create and construct a portfolio of assets to maximize returns within a given level of risk, or to devise one with a desired, specified and expected level of return with the least amount of risk. Under this broader concept, answer the followings: a) Justify, why an optimal portfolio should lie on security market line curveIn order to benefit from diversification, the returns on assets in a portfolio must: Answer a. Not be perfectly positively correlated b. Have the same idiosyncratic risks c. Be perfectly positively correlated d. Be perfectly negatively correlated1. How to compare different assets in investment selection process? 2. What are the quantitative characteristics of the assets and how to measure them? 3. How does one asset in the same portfolio influence the other one in the same portfolio? 4. And what could be the influence of this relationship to the investor’s portfolio? 5. What is relationship between the returns on an asset and returns in the whole market (market portfolio)?
- 1.1 Problem 1: Answer with a clear true/false, and provide a detailed explanation to substantiate your answer: An optimal portfolio should never include assets whose expected return and standard deviation are dominated by other available assets.1. Discuss any two theories of portfolio management. 2. Is it possible to eliminate all risk using diversification. Explain your answer.Diversification is good: Select one: a. To increase the net financial cash flows of your portfolio. b. To minimize the risk of your portfolio c. To minimise possible returns. d. None of the given answers is correct.
- Explain why diversifying your portfolio does not always eliminate risk. What are the effects of investing in -- 1. uncorrelated assets; 2. positively correlated assets; 3. negatively correlated assets-- when it comes to risk and diversificationWhenever you make an investment decision, you need to consider its impacts on the diversification of your portfolio and the allocation of your assets. a. false b. depends c. maybe d. trueWhat does it mean that portfolio diversification can reduce risk, and how does the efficient frontier logically fit into this discussion? include correlation, asset allocation, and asset classes or benchmarks in your answer.
- Indicate whether its True or False. Then write the explanation! In the presence of diversification benefits, when we combine two assets together into a portfolio, the systematic risk of the portfolio will be less than the weighted average systematic risk of the individual assets in the portfolio.Combining two or more assets in an investment portfolio will typically lead to diversification benefits.(i) What is the benefit of diversification?(ii) What is the general condition under which diversification will have benefits? Briefly explain why.Discuss how risk can be reduced by diversification in a two-asset portfolio. Your discussion should include the impact of correlation and covariance on a portfolio. Use examples to show the main drivers that bring down the risk of a two-asset portfolio.