Question 6 --In a portfolio of two different investments, the overall riskiness of the portfolio, at least in theory, could be less than the risk inherent in either of the individual assets if they were held in isolation.

a. True

b. False

Question 7 Which of the following statements concerning financial risk is false?

a. Generically, financial risk is related to the probability of a return that is less than expected.

b. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk.

c. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will not affect risk.

d. In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy.

e. Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.

Question 8 In the real world, as randomly chosen investments are added to a portfolio, the riskiness of the portfolio decreases. If enough investments are added, all risk can be eliminated.

a. True

b. False

Question 9 If an organization's managers are risk averse, they will always (and only) prefer an investment opportunity with lower risk to an investment opportunity with higher risk.

a. True

b. False

Question 10 The most important determinant of an investment's portfolio risk is which of the following?

a. The standard deviation of the investment's return distribution

b. The variance of the investment's return distribution

c. The size of the investment

d. The correlation of the investment's returns with the returns of other investments in the portfolio

e. The risk-free rate of return