Asked by Denia Martinez on Jun 24, 2024
Verified
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global-minimum variance portfolio has a standard deviation that is always
A) greater than zero.
B) equal to zero.
C) equal to the sum of the securities' standard deviations.
D) equal to −1.
Perfectly Negatively Correlated
Refers to a relationship where one variable increases exactly as the other decreases, indicating a complete opposite movement between the two.
Standard Deviation
A measure of the amount of variation or dispersion in a set of values, often used to quantify the risk of an investment.
Global-minimum Variance Portfolio
An investment portfolio that is constructed to have the lowest possible risk (variance) for a given rate of return.
- Calculate and interpret the expected rates of return and standard deviations for portfolios.
Verified Answer
PS
Patel ShivaniJun 28, 2024
Final Answer :
B
Explanation :
When two securities are perfectly negatively correlated, combining them in the right proportions can result in a portfolio with a standard deviation of zero, meaning no risk. This is because the negative correlation allows the securities' price movements to offset each other perfectly.
Learning Objectives
- Calculate and interpret the expected rates of return and standard deviations for portfolios.