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Basic Question 19 of 23
Assume that a risk-averse investor owning stock in White Corporation decides to add the stock of either Black or Green Corporation to her portfolio. All three stocks offer the same expected return and total risk. The covariance of returns between White and Black is -0.05 and between White and Green is +0.05. Portfolio risk is expected to ______
B. decline more by buying Green.
C. increase by buying either Black or Green.
D. decline or increase depending on other factors.
A. decline more by buying Black.
B. decline more by buying Green.
C. increase by buying either Black or Green.
D. decline or increase depending on other factors.
User Contributed Comments 7
| User | Comment |
|---|---|
| harshjit | adding black corp, to the portfolio, negative covariance (-0.5) reduces the risk |
| tom1980 | how about the additional variance of the black corp itself? |
| dobrekone | tom1980: It was stated that: "All three stocks offer the same expected return and --total risk--". Meaning, the total variance of the black corp is the same as of the green. |
| mordja | It wouldnt matter regardless of individual variance, it is covariance that matters to the overall portfolio varance. |
| johntan1979 | Owh! I was thinking what about the covariance of Green-Black, and then I re-read the question... "...decides to add the stock of EITHER Black or Green..." T___T" |
| gill15 | Always bet on black |
| khalifa92 | so she bought both stock or one? questions like these make me question my English. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data
calculate and interpret portfolio standard deviation
describe the effect on a portfolio's risk of investing in assets that are less than perfectly correlated
CFA® 2024 Level I Curriculum, Volume 2, Module 1.