Solve 3 a b and c 3. а)When P12 = +1, the standard deviation of a two-security portfolio P is equal to the weightedaverage of the standard deviations of its component securities. Is this statement true? Givereasons for your answer.b)Explain how a portfolio along the efficient frontier is better than other portfolios in the feasibleset?c) Which one of the following portfolios cannot lie on the efficient frontier as described byMarkowitz?PortfolioExpected ReturnStandard DeviationW9%21%X5%7%Y15%36%Z12%15%

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a) When p12 = +1, the standard deviation of a two-security portfolio P is equal to the weighted average of the standard deviations of its component securities. Is this statement true? Give reasons for your answer.

a) When p12 = +1, the standard deviation of a two-security portfolio P is equal to the weighted average of the standard deviations of its component securities. Is this statement true? Give reasons for your answer.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Solve 3 a b and c

3. а)
When P12 = +1, the standard deviation of a two-security portfolio P is equal to the weighted
average of the standard deviations of its component securities. Is this statement true? Give
reasons for your answer.
b)
Explain how a portfolio along the efficient frontier is better than other portfolios in the feasible
set?
c) Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio
Expected Return
Standard Deviation
W
9%
21%
X
5%
7%
Y
15%
36%
Z
12%
15%

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SD when ρ(1,2) = +1

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