Theoretically, a risk-free portfolio could be created by combining risky securities in a manner that caused the:
A) Portfolio standard deviation to equal one.
B) Expected return of the portfolio to equal the market expected return.
C) Portfolio beta to equal zero.
D) Risk premium to equal one.
E) Nondiversiﬁable risk to be eliminated.

Question

Quizplus · Accepted Answer

A risk-free portfolio is one that has zero beta, meaning that it is not sensitive to market movements. The other options are not sufficient to create a risk-free portfolio. A portfolio with a standard deviation of one can still be sensitive to market movements and have nondiversifiable risk. Similarly, matching the portfolio's expected return to the market's expected return does not eliminate the portfolio's exposure to risk. Finally, the risk premium is a measure of the excess return achieved by taking on additional risk, and it has nothing to do with creating a risk-free portfolio.

Theoretically, a Risk-Free Portfolio Could Be Created by Combining Risky