Question: Explain and discuss the factors (or variables) that determine (or influence) the variance of returns for a risky, two-security, portfolio. Discuss the effect of diversification

  1. Explain and discuss the factors (or variables) that determine (or influence) the variance of returns for a risky, two-security, portfolio.
  2. Discuss the effect of diversification on a portfolio's total risk. Hint: You may want to discuss/explain how diversification can impact the two (2) types of risk that comprise total risk for a diversified portfolio.
  3. A portfolio's beta coefficient is a measure of risk. Discuss the factors that influence portfolio beta, and how adjusting these factors can impact portfolio risk.
  4. Why is the reward-to-risk ratio constant for every asset in a well-functioning capital market? Discuss.
  5. Referring to what we learned in Chapter 13 about the Capital Asset Pricing Model (CAPM), explain (and discuss) the difference between a security's "excess return" and its "abnormal return."

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