[Nickhp44]

Hey!

I have a couple of questions that I think I got the answers to but need a little help...


(1)
For a security to help diversify a portfolio, the asset

a. must generate a greater return than the average return on the portfolio
b. should not be sensitive to changes in security prices
c. should have a return that is negatively correlated with the return on other securities in the portfolio
d. must be a debt instrument if the portfolio consists primarily of stocks

I think it's C but getting a little confused...


&
(2)
Which of the following will reduce the required return on an investment?

a. an increase in beta and a reduction in the Treasury bill rate
b. an increase in the Treasury bill rate and a decrease in beta
c. a decrease in the Treasury bill rate and a decrease in beta
d. an increase in the Treasury bill rate and an increase in beta

Pretty sure this is B

[mikedever]

C (negative correlation) would definitely add portfolio diversification, but also, B could be a correct answer if "security prices" refers to the rest of the portfolio. In general though, I don't like the question or any of the answers. Who wrote these questions? Here are some complimentary links to chapters in my book where I discuss portfolio diversification:
http://jackassinvesting.com/lookinside/lookinside_chapter_17-77.php
http://jackassinvesting.com/lookinside/lookinside_chapter_18-00.php
http://jackassinvesting.com/lookinside/lookinside_chapter_19-98.php
http://jackassinvesting.com/lookinside/lookinside_chapter_20-80.php