Exam 6: Efficient Diversification

The correlation coefficient between two assets equals ________.

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 4%. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is ________.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.

An investor's degree of risk aversion will determine his or her ________.

A measure of the riskiness of an asset held in isolation is ________.

Risk that can be eliminated through diversification is called ________ risk.

Diversification is most effective when security returns are ________.