You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5%, regardless of the economic state. Given this, what must be value of the portfolio's variance be?
A)negative, but not −1
B)−1.0
C)0
D)1.0
E)positive, but not +1

Question

Quizplus · Accepted Answer

According to the question, the expected rate of return is the same regardless of the economic state. This means that the portfolio is not affected by any changes in the economy and is a risk-free portfolio. The variance of a risk-free portfolio is always zero. Therefore, the value of the portfolio's variance must be zero.

You Own a Portfolio Comprised of 4 Stocks and the Economy