1. Which of the following statements about portfolio diversification is incorrect?
A. Other things equal, the higher the correlation between individual stocks, the lower the portfolio’s overall risk.
B. As you diversify your portfolio (i.e., as you include more individual stocks in your portfolio), you can reduce the overall portfolio variance.
C. In reality most stocks are positively correlated one another but never perfectly correlated.
D. When you have 500 stocks in your portfolio and you want to determine the portfolio variance based on the covariances between component stocks, you will have to consider as many as 124,750 covariances.
2. Which of the following statements about the beta coefficient ( ) is incorrect?
A. Beta is a measure of the systematic risk.
B. It essentially measures how sensitively a stock moves (reacts) to changes in the overall market.
C. Theoretically, beta can be equal to zero but can’t be negative.
D. Assets with high betas tend to do better in good times and worse in bad times than those with low betas.