Adding alternative investments to a traditional portfolio can increase expected returns and reduce systematic risk.
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Adding alternative investments to a traditional portfolio can increase expected returns and reduce systematic risk.
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- As one adds more assets to a portfolio in order to achieve diversification, what will happen to the portfolio’s risk?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.After combining a riskfree asset with the efficient frontier of risky portfolios, you no longer need to know an investor's preferences over risk and return to identify the risky portfolio they should hold. Group of answer choices True False
- 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: Justify, why an optimal portfolio should lie on security market line curveWhat is the expected return on a portfolio? How can the expected return on a portfolio be manipulated to minimize the risk on that portfolio? Justify your answer.Which of the following statements is correct? A delta-neutral portfolio is protected against large changes in the underlying asset price. The delta hedging error increases as gamma decreases. To change the vega of a portfolio, we need to trade the portfolio’s underlying asset. A delta-neutral portfolio needs to be rebalanced more frequently as the gamma increases to maintain delta-neutrality. Please explain and justify your choice using your own words.
- Describe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.An efficient portfolio is one that: Select one: a. maximises return for a given level of risk. b. maximises risk for a given level of return. c. minimises risk for a given rate of return. d. Both A and C. are efficient portfolios.When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will a. Increase the expected return and standard deviation of the portfolio b. Increase the standard deviation of the portfolio c. Decrease the standard deviation of the portfolio d. Increase the expected return of the portfolio
- Discuss the difference between Systematic Risk and Unsystematic Risk. What kind of strategies wecan use for creating an efficient portfolio?Which of the following statements are true? Explain.a. A lower allocation to the risky portfolio reduces the Sharpe (reward-to-volatility) ratio.b. The higher the borrowing rate, the lower the Sharpe ratios of levered portfolios.c. With a fixed risk-free rate, doubling the expected return and standard deviation of the risky portfolio will double the Sharpe ratio.d. Holding constant the risk premium of the risky portfolio, a higher risk-free rate will increase the Sharpe ratio of investments with a positive allocation to the risky asset.Portfolio diversification is the cornerstone of reducing risk in a portfolio. How would you use the Excel spreadsheet to quantify and reduce the risk in your risky asset investment portfolio?