Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The variance of the minimum variance portfolio must be zero. Group of answer choices True False

Consider the following data on returns (R), standard deviation (σ), and correlations (r) for two stocks:

R₁ = 10%, σ₁ = 4%, R₂ = 20%, σ₂ = 6%, r₁₂ = -1.0

Find the weights of stocks 1 and 2 (W1 and W2) that will yield the minimum variance of a portfolio of stocks 1 and 2.

4. W1=0.70, W2=0.30

If a stock portfolio is well-diversified, then the portfolio variance:

A. Will equal the variance of the most volatile stock in the portfolio.

B. Maybe less than the variance of the least risky stock in the portfolio.

C. Must be equal to or greater than the variance of the least risky stock in the portfolio.

D. Will be a weighted average of the variance of the individual securities in the portfolio.

E. Will be an arithmetic average of the variances of the individual securities in the portfolio.

Assume N securities. The expected returns on all the securities are equal to 0.01 and the variances of their returns are all equal to 0.01. The covariances of the returns between two securities are all equal to 0.005.

1.What are the expected return and the variance of the return on an equally weighted portfolio of all N securities?

2.What value will the variance approach as N gets large?

3.What characteristic of the securities is most important when determining the variance of a well-diversified portfolio?