Session 12: Portfolio Management
Reading 53: Portfolio Risk and Return: Part II
LOS a: Discuss the implications of combining a risk-free asset with a portfolio of risky assets.
Which of the following statements about asset pricing models is most accurate?
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A) |
Assuming assets are not perfectly positively correlated, the systematic risk of a portfolio decreases as more assets are added. | |
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B) |
Adding the risk-free asset to a portfolio will reduce return and total risk. | |
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C) |
According to the Capital Asset Pricing Model (CAPM), the expected rate of return of a portfolio with a beta of 1.0 is the market expected return. | |
Diversification reduces unsystematic, or unique risk. With the risk-free asset and a portfolio of risky assets, the equation for the expected standard deviation is linear: wAsA . A combination of the risk free asset and a portfolio always gives more return for a given level of risk. Risk tends to be reduced, but assuming that assets are not perfectly positively correlated, an investor can achieve the benefits of diversification by adding just one security (Markowitz). Studies have shown that approximately 18-30 stocks are needed for proper diversification. The main point is that the number of stocks required is small and is significantly less than all securities (and significantly less than 1,000 securities).
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发表于 2011-3-24 15:53
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