the standard deviation of the portfolio's return is lower than those of the two securities, A...

80.2K

Verified Solution

Question

Finance

the standard deviation of the portfolio's return is lower thanthose of the two securities, A and B. What is the intuition behindthis? Is it always the case? Examine how the returns on these twosecurities behave. Do they move together or in oppositedirections?
Meaning of the Beta
If there is a security with a negative beta, for example -0.5,what can you say about the expected return of the security based onthe Capital Asset Pricing Model (CAPM), or the Security Market Line(SML)? Would it be greater or smaller than the risk-free interestrate? How can you explain your answer intuitively?

Answer & Explanation Solved by verified expert

4.0 Ratings (578 Votes)

As per the Modern Portfolio theory Whenever we combine securities in a portfolio Expected return of the portfolio ERp weighted average of the returns of individual stocks Standard deviation of the portfolio is less than OR Equal to Weighted average of standard deviations of individual stocks In other words risk gets reduced in a portfoliowe called is benefit of See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member