Podcast
Play an AI-generated podcast conversation about this lesson
Questions and Answers
What is the main purpose of the portfolio approach mentioned in the text?
What is the main purpose of the portfolio approach mentioned in the text?
- To evaluate individual securities based on their potential returns.
- To randomly select and invest in individual securities without analyzing their characteristics.
- To reduce the risk associated with wealth while maintaining expected returns. (correct)
- To increase the volatility of returns for individual securities.
How does the portfolio approach help in managing risk?
How does the portfolio approach help in managing risk?
- By increasing the expected returns of individual securities.
- By offering lower overall volatility of returns with equivalent expected returns. (correct)
- By randomly selecting securities with similar characteristics.
- By increasing the overall volatility of returns for a basket of securities.
Why is the standard deviation of an equally weighted portfolio not simply the average of standard deviations of individual shares?
Why is the standard deviation of an equally weighted portfolio not simply the average of standard deviations of individual shares?
- Because equal weighting reduces the impact of high-risk securities.
- Because portfolio standard deviation is affected by correlations between securities. (correct)
- Because averaging standard deviations leads to inaccurate risk assessment.
- Because individual securities have varying levels of risk and return.
What does the diversification ratio represent in relation to standard deviation?
What does the diversification ratio represent in relation to standard deviation?
Signup and view all the answers
How do portfolios generally compare to individual securities in terms of expected return and volatility?
How do portfolios generally compare to individual securities in terms of expected return and volatility?
Signup and view all the answers
In what way does the portfolio approach differ from evaluating individual securities in isolation?
In what way does the portfolio approach differ from evaluating individual securities in isolation?
Signup and view all the answers
What key benefit does the portfolio approach provide in terms of wealth risk management?
What key benefit does the portfolio approach provide in terms of wealth risk management?
Signup and view all the answers
