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Risk of a portfolio can be minimised by which one of the following ?

Risk of a portfolio can be minimised by which one of the following ? Correct Answer Combining two securities having perfect negative correlation in their expected returns.

Portfolio Management:

  1. A portfolio is the total collection of all investments held by an individual or institution, including stocks, bonds, real estate, options, futures, and alternative investments, such as gold or limited partnerships.
  2. Portfolio risk is a chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives. Each investment within a portfolio carries its own risk, with higher potential return typically meaning higher risk.
  3. Portfolio risk consists of 2 components: systematic risk and unsystematic risk.
    • Systematic risks are risks that affect all assets, such as general economic conditions, and, thus, systemic risk is not reduced by diversification.
    • Unsystematic risks are risks specific to particular assets, such as factors that affect particular businesses and their stocks. Unsystematic risks can be reduced by diversification. 

  1. Correlation statistically measures the degree of relationship between two variables in terms of a number that lies between +1.0 and -1.0.
  2. When it comes to diversified portfolios, correlation represents the degree of relationship between the price movements of different assets included in the portfolio.
  3. A correlation of +1.0 means that prices move in tandem; a correlation of -1.0 means that prices move in opposite directions.
  4. A correlation of 0 means that the price movements of assets are uncorrelated; in other words, the price movement of one asset has no effect on the price movement of the other asset.
  5. Diversification naturally appeals to the risk-averse creature inside every investor.
  6. Betting all your money on just one horse seems riskier than spreading out your bets on four different horses—and it can be.
  7. Diversification works best when assets are uncorrelated or negatively correlated with one another so that as some parts of the portfolio fall, others rise.

Thus, the risk of a portfolio can be minimized by combining two securities having a perfect negative correlation in their expected returns.

Related Questions

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