BANKING AFFAIRS

Detailed explanation-1: -Covariance measures the directional relationship between the returns on two assets. A positive covariance means asset returns move together, while a negative covariance means they move inversely.

Detailed explanation-2: -Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will actually get a higher return by accepting more risk. Diversification enables you to reduce the risk of your portfolio without sacrificing potential returns.

Detailed explanation-3: -When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio? the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.

Detailed explanation-4: -As noted before, the covariance of the risk-free asset and the market portfolio and the standard deviation of the risk-free asset are both zero. However, using Equation (4), we see that the correlation coefficient of the risk-free asset and the market portfolio is undefined.

Detailed explanation-5: -Correlation statistically measures the degree of relationship between two variables in terms of a number that lies between +1.0 and-1.0. When it comes to diversified portfolios, correlation represents the degree of relationship between the price movements of different assets included in the portfolio.