The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.
Answer: TRUE
The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.
Answer: FALSE
When assets are positively correlated, they tend to rise or fall together.
Answer: TRUE
The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.
Answer: FALSE
A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.
Answer: TRUE
Adequate portfolio diversification can be achieved by investing in several companies in the same industry.
Answer: FALSE
A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.
Answer: TRUE
Most financial assets have correlation coefficients between 0 and 1.
Answer: TRUE
Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.
Answer: FALSE
When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.
Answer: FALSE
A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.
Answer: TRUE
An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.
Answer: TRUE
The greater the dispersion of possible returns, the riskier is the investment.
Answer: TRUE
For the most part, there has been a positive relation between risk and return historically.
Answer: TRUE
The benefit from diversification is far greater when the diversification occurs across asset types.
Answer: TRUE
Investing in foreign stocks is one way to improve diversification of a portfolio.
Answer: TRUE
