In finance, how does a portfolio's risk generally compare to that of an individual asset’s________?
Show answer Hide answer
Answer: B. Weighted average
Explanation
The expected return and risk parameters of a portfolio are generally determined by the weighted average of its components. Combining multiple assets with imperfect correlations reduces overall portfolio risk below the weighted average volatility. Diversification benefits allow investors to maximize expected returns for a given level of systematic risk. Modern portfolio theory demonstrates that portfolio variance depends on asset weights, individual variances, and covariances. The weighted average expected return is simply the sum of each asset's return multiplied by its portfolio weight. Correlation coefficients measure how synchronously two different asset prices move together over time.
Asset managers construct diversified portfolios to protect client investments against individual stock market crashes. Institutional pension funds utilize portfolio optimization models to balance risk and return across asset classes. Individual savers build mutual funds to capture the diversification benefits of holding numerous underlying securities. Mean represents a central tendency measurement rather than the specific relationship governing portfolio risk. Mean correlation describes average asset co-movement statistics rather than the portfolio risk calculation. Negative correlation is a specific condition that enhances diversification rather than the general portfolio risk rule.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
Related questions
Q1. What is the price movement or fluctuation of options classified as_________?
Show answer Hide answer
Answer: D. Binomial lattice
A binomial lattice is a mathematical model used to illustrate price movements of options. It constructs a tree diagram showing potential upward and downward price changes over time. This graphical approach helps analysts...
Q2. Mr. Y and Mr. Z are planning to share their capital to run a business. They are going to employ which of the following types of business?
Show answer Hide answer
Answer: B. Partnership
A business owned and operated jointly by two or more individuals sharing capital and responsibilities is a partnership. Partners combine their financial resources and management expertise to pursue common commercial obje...
Q3. When does ownership of a mortgaged property transfer to a financial institution____________?
Show answer Hide answer
Answer: A. borrower defaults
Ownership or foreclosure rights on a mortgaged property transfer to the institution upon default. Loan agreements grant lenders legal recourse to seize and sell collateral if borrowers fail to pay. The correct choice acc...
Q4. You require Rs. 10,000 to purchase a new television set. Given Rs. 6,000 available for investment at an annual compound interest rate of 5 percent, how long must you wait before making the purchase?
Show answer Hide answer
Answer: B. 10.51 years
Solving the compound interest formula for time yields approximately 10.51 years. Growing Rs. 6,000 at a 5 percent annual rate reaches the target Rs. 10,000 over this period. Mathematical logarithmic calculation confirms...
Q5. How is the nominal rate quoted to consumers on loans considered__________?
Show answer Hide answer
Answer: A. Annual percentage rate
The annual percentage rate represents the annualized nominal interest rate charged on consumer loans. This standardized metric allows borrowers to compare the relative cost of borrowing across different financial product...
Q6. What is calculated by adding the selling price to the repurchase agreement's paid interest____________?
Show answer Hide answer
Answer: B. repurchase price of securities
The repurchase price of securities is determined by adding accrued interest to the original sale price. The difference between selling and repurchase prices represents the interest earned on the loan. The correct option...