Reference no: EM132460093

1. Elaborate on what is diversification.

2. In forming a portfolio of two risky assets, what must be true of the correlation coefficient between their returns if there are to be gains from diversification? Explain.

3. Asset A has an expected return of 10% and a reward-to-variability ratio of 0.5. Asset B has an expected return of 14% and a reward-to-variability ratio of 0.4. A risk-averse investor would prefer a portfolio using the risk-free asset and ________.

A) asset A

B) asset B

C) no risky asset

D) The answer cannot be determined from the data given.

4. Suppose that a stock and a bond have a zero correlation. How would the returns on the stock would move relative to the returns on the bond?

5. What does a complete portfolio consist of? What is "excess return"?

6. Which of the following is/are the identifiers of the optimal risky portfolio? [Select all those apply.]

I. The minimum-variance point on the efficient frontier

II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier

III. The tangency point of the capital market line and the efficient frontier

IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

7. The return and standard deviation of return on investment X are 20% and 10%, respectively. The return and standard deviation of return on investment Y are 8% and 5%, respectively. Covariance of returns on X and Y is 0.0030. What is the correlation coefficient between the returns on A and B?

8. Explain what efficient frontier is.