Risk Free Asset correct, regarding, following, statements, capital

lunarfollies

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.




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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?