QUESTION 1 Which of the following statements is true regarding the variance or standard deviation of a portfolio of two risky securities? O a. The portfolio variance is independent of the correlation between securities. If the two securities are perfectly negatively correlated, the minimum variance portfolio has a standard devaition that is greater than zero. O C. The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. d. There is a linear relationship between the securities' coefficient of correlation and the portfolio's standard deviation. Oe. If the two securities are not correlated, the minimum variance portfolio has a standard devaition that equals zero.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
The degree of correlation between between various security is will be deciding the level of standard deviation and total risk in portfolio. Investors are having a preference for lower correlation coefficient in order to lower down the unsystematic risk.
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