Which of the following statements regarding the risk-free asset is least accurate?
A) Markowitz portfolio theory develops into capital market theory with the inclusion of a risk-free asset.
B) The covariance of the risk-free asset with other assets is +1.
C) The variance of the risk-free asset is zero.
Your answer: B was correct!
The risk-free rate is constant so it does not co-vary with other assets. Thus the covariance is zero.
----
Two Questions on the explanation:
1) Is the risk free rate really constant--doesn't the treasury rate move daily?
2) Why is the covariance zero--can't the covariance be higher for assets that have high correlation with macroeconomic factors and lower for assets that have low correlation with macro econoimc factors? |