Which three of the following statements are correct?
A) For a portfolio to be described as efficient there must be no other combinations of proportions of the underlying investments which provide a higher return for the same risk.
B) Portfolio returns are a weighted average of the expected returns on the individual investments but portfolio standard deviation is more than the weighted average risk of the individual investments.
C) Both covariance and the correlation coefficient measure the degree to which returns move together.
D) The degree of risk reduction from diversification depends on the extent of statistical interdependence between the returns of the different investments.

Question

Quizplus · Accepted Answer

A) This statement is correct because an efficient portfolio maximizes return for a given level of risk, meaning that there is no other portfolio with the same or lower risk level that has a higher return.
B) This statement is incorrect because portfolio standard deviation is actually less than the weighted average risk of the individual investments due to diversification. 
C) This statement is correct because both covariance and the correlation coefficient measure the relationship between the returns of two investments. 
D) This statement is correct because the extent of statistical interdependence between investments affects the risk reduction from diversification. The less correlated the returns, the greater the potential risk reduction from diversification.

Which Three of the Following Statements Are Correct