12a) As the number of assets contained within an investment portfolio increases, say, from 3 to 10 assets, what typically occurs? (1) The level of total risk remains constant, but the proportion of idiosyncratic risk to total risk declines. (2) The level of total risk declines, but the level of portfolio-specific risk increases. (3) The level of idiosyncratic risk declines, but the level of systematic risk increases. (4) The level of total risk declines, but the level of systematic risk increases. (5) More than one of the above are true. (6) None of the above are true. Enter a value from 1 to 6 to reflect your answer.

b) Consider Stocks A and B. The two stocks have a correlation (of returns) of 40%. The expected return of Stocks A and B (i.e. the fair discount rates), are 8.2% and 12.2% respectively measured as an EAR.

The annualized volatility of Stock A is 45%. The annualized volatility of Stock B is 80%.

Which of the following statements are true once the two stocks are combined into a two-asset portfolio?

(1) The annualized volatility of the portfolio will be equal to the arithmetic average of the annualized volatility of stocks A and B.

(2) The annualized volatility of the portfolio will be less than the arithmetic average of the annualized volatility of stocks A and B.

(3) The expected return of the portfolio will be equal to the arithmetic average of the expected returns of stocks A and B.

(4) The expected return of the portfolio will be less than the arithmetic average of the expected returns of stocks A and B.

(5) Both (1) and (3) are correct.

(6) Both (1) and (4) are correct.

(7) Both (2) and (3) are correct.

(8) Both (2) and (4) are correct.

(9) All of the above are incorrect.

Enter a value from 1 to 9 to reflect your answer