ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Risker than risk-free asset.
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Less risky than risk-free asset.
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As risky as the risk-free asset.
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None of the above
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Detailed explanation-1: -To invest more, you can borrow money at the risk-free rate by selling the risk-free asset and can use that extra money to invest more in the minimum variance portfolio. Since the risk-free asset is “risk-free”, it has zero variance.
Detailed explanation-2: -Definition: A minimum variance portfolio indicates a well-diversified portfolio that consists of individually risky assets, which are hedged when traded together, resulting in the lowest possible risk for the rate of expected return.
Detailed explanation-3: -A minimum variance portfolio is a collection of securities that combine to minimize the price volatility of the overall portfolio. Volatility is a measure of a security’s price movement (ups and downs).
Detailed explanation-4: -Although the diversifiable risk of a portfolio obviously depends on the risks of the individual assets, it is usually less than the risk of a single asset because the returns of different assets are up or down at different times.