Q1. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case? Q2. Theoretically, returns on stocks or assets can be negatively correlated. In the real world, however, we usually encounter only positive correlations. Why may this be the case? Q3. It is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariances of the securities in the portfolio. What does this mean?
Q1. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case? Q2. Theoretically, returns on stocks or assets can be negatively correlated. In the real world, however, we usually encounter only positive correlations. Why may this be the case? Q3. It is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariances of the securities in the portfolio. What does this mean?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 9MC
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Q1. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case?
Q2. Theoretically,
Q3. It is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariances of the securities in the portfolio. What does this mean?
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