The measure of risk for pairs of stocks in a portfolio selection problem is called:
A)the covariance of the return
B)the variance of the return
C)the expected return
D)decreasing marginal return
E)None of the above

Question

The measure of risk for pairs of stocks in a portfolio selection problem is called:
A)the covariance of the return 
B)the variance of the return 
C)the expected return 
D)decreasing marginal return 
E)None of the above

Quizplus · Accepted Answer

The measure of risk for pairs of stocks in a portfolio selection problem is quantified by the covariance of the return, which measures the degree to which the returns of two stocks move together. A positive covariance means that the returns move in the same direction, while a negative covariance signifies that the returns move in opposite directions. Therefore, option A, the covariance of the return, is the correct answer. Option B, the variance of the return, refers to the risk of a single stock, but not the risk of the stock in relation to others. Option C, the expected return, is a measurement of the average return of an investment, but it does not account for the risk involved. Option D, decreasing marginal return, is not related to portfolio risk or stock returns. Finally, option E is inaccurate, as one of the above options, A, is correct.

The Measure of Risk for Pairs of Stocks in a Portfolio