CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Security A has an expected return of 18% and a standard deviation of 40%. Securities B and C each have expected returns of 12% and standard deviations of 20%. If the correlation between the rates of return for A and B is 0.35, and for A and C is 0.85, then investors holding only A ______
A. who want to reduce risk would be better off adding B to their portfolios.
B. who want to reduce risk would be better off adding C to their portfolios.
C. would need to know the correlation between the rates of return for B and C to determine which security offers the best opportunity for risk reduction.
Explanation: Since B and C have the same expected return and standard deviation, the lower correlation of A and B will provide portfolios with superior opportunities to reduce risk.

User Contributed Comments 6

User Comment
murli Adding the assets with lower correlation will reduce the risk of portfolio.
chuong Lower coeffiriennt correlation -> lower covariance - > lower Portfolio variance
Criticull it's not negative, but something is better than nothing.
MattNYC In large portfolios one does not need not to know the correlation but the AVG. COV between securities, since Portfolio size > Corr = Avg. Cov.
Mhmdjamal same SD of both securities B&C,does it mean they perfectly correlated?
Pusgkin94 Why not C?
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