When assessing the risk impact of adding a new security to a portfolio, it is necessary to consider the
A) new security's variance
B) variance of every security in the portfolio
C) weight of every security in the portfolio
D) average covariance of the new security with every security in the portfolio
E) all of the above

Question

Quizplus · Accepted Answer

When assessing the risk impact of adding a new security to a portfolio, it is necessary to consider all of the above factors. The new security's variance will determine its individual risk level. The variance of every security in the portfolio will determine how the new security will impact the overall risk level of the portfolio. The weight of every security in the portfolio will also determine how the new security will impact the overall risk level of the portfolio. Finally, the average covariance of the new security with every security in the portfolio will determine how the new security will interact with the existing securities in the portfolio. Therefore, all of the above factors are necessary to consider when assessing the risk impact of adding a new security to a portfolio.

When Assessing the Risk Impact of Adding a New Security