Because most asset yields are affected in a systematic way by economic conditions, most securities in portfolios
A) have a covariance greater than zero.
B) have negative yields.
C) have covariance greater than one.
D) increase in risk as new assets are added.

Question

Quizplus · Accepted Answer

Covariance measures the degree to which two variables move in relation to each other. Most asset yields are affected by economic conditions, meaning they are influenced by macroeconomic factors such as interest rates, inflation, and market trends. As a result, the returns of most securities in portfolios are positively correlated, meaning they move in the same direction. Therefore, they have a covariance greater than zero.

Because Most Asset Yields Are Affected in a Systematic Way