The measure of risk for pairs of stocks in a portfolio selection problem is called:
A) the covariance of the return.
B) the variance of the return.
C) the expected return.
D) decreasing marginal return.
E) None of the choices is correct.

Question

Quizplus · Accepted Answer

The measure of risk for pairs of stocks in a portfolio selection problem is the covariance of the return. This measures how the returns of the two stocks move together. A high positive covariance means that the two stocks tend to move up and down together, while a high negative covariance means that they tend to move in opposite directions. The covariance, along with the expected return and individual variances, is used to calculate the efficient frontier of a portfolio.

The Measure of Risk for Pairs of Stocks in a Portfolio