Two important terms when discussing symmetry vare correlation and correlation coefficient. Correlation is the tendency of two variables to move together, while correlation coefficient is a measure of the degree of relationship between two variables. If a portfolio consists of two stocks that are perfectly positively correlated then the portfolio is riskless because the stocks' returns move counter cyclically to each other. If the returns of the stocks are perfectly positively correlated then the stocks' returns would move up and down together and the portfolio would be exactly as risky as the individual stocks. In this situation, diversification would be completely useless for reducing risk. In reality, most stocks are positively correlated but not perfectly. So, combining stocks into portfolios reduces risk but does not completely eliminate it. This illustrates that diversification can reduce risk, but not completely eliminate risk Portfolios risk can be broken down into two types. Diversifiable y risk is that part of a security's risk associated with random events. It can be eliminated by proper diversification and is also known as company-specific risk. On the other hand, diversifiable risk is the risk that remains in a portfolio after diversification has eliminated all company-specific risk. Standard deviation is not a good measure of risk when a stock is held in a portfolio. A stock's relevant risk is the risk that remains once a stock is in a diversified portfolio. Its contribution to the portfolio's market risk is measured by a stock's risk premium X which shows the extent to which a given stock's returns move up and down with the stock market. An average stock's beta is equal to 1 because an average-risk stock is one that tends to move up and down in step with the general market. A stock with a beta equal to X 1 is considered to have high risk, while a stock with beta equal to X 1 is considered to have low risk. Hide Feedback Partially Correct Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment Beta A B D Total investment $300,000 100.000 400,000 200,000 1,000,000 1.3 1.7 0.8 -0.35 The market's required return is 11% and the risk-free rate is 4%. What is the portfolio's required return? Round your answer to 3 decimal places. Do not round intermediate calculations, 3% Hide Feedback X