Practice Question
Match the following statements to true or false:
A) When two risky securities with a correlation of less than one, the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.
B) There is no benefit from diversification if the correlation coefficient is 0.
C) Standard deviation measures market risk, whereas beta measures unique risk of a portfolio.
D) There is no benefit from diversification if the correlation coefficient is 1.
E) All portfolios on the efficient frontier have the same variance to return ratio.
F) The minimum variance portfolio represents the lowest level of variance that an efficient portfolio can have.
G) All portfolios on the efficient frontier are attainable.
A. TRUE B. FALSE C. FALSE D. TRUE E. FALSE F. TRUE G. TRUE
- A) True. Correlation less than 1 reduces overall portfolio risk, making standard deviation less than the weighted average.
- B) False. Even with a zero correlation, diversification reduces risk because the assets don’t move together.
- C) False. Standard deviation measures total risk (systematic + unsystematic), while beta measures only systematic risk.
- D) True. Perfect correlation (1) implies no diversification benefit; securities move identically.
- E) False. Variance-to-return ratios vary along the frontier since risk-return preferences differ per investor.
- F) True. The minimum variance portfolio provides the lowest risk possible among efficient portfolios.
- G) True. All efficient frontier portfolios are attainable given rational investor behavior and diversification.