# Portfolio Management - Portfolio Management Section 1

>>>>>>>>Portfolio Management Section 1

• Option : A
• Explanation : Higher correlations will result in a lower diversification benefit and higher volatility.

• Option : C
• Explanation : 10% = w¡* 16 % + (1 – w¡)* 6%; w¡ = 40%, (1 – w¡) = 60%.
Thus, 40 percent should be invested in the small-cap fund and 60 percent should be invested in the bond fund.

 Asset Portfolio Weight Standard deviation ABC 30% 10% JKL 70% 8%

• Option : A
• Explanation : Portfolio standard deviation = √((0.3)² (0.1)² + (0.7)² (0.08)² + 2 (0.8)(0.3)(0.7)(0.1)(0.08)) = 0.082 = 8.2%.

• Option : B
• Explanation : Diversification benefit is greatest when a portfolio consists of securities that do not move together and thus the investor should invest in securities with the lowest correlation i.e. – 0.86.

 Security A B C A. 1 B. -1 1 C. 0.5 -0.5 1

• Option : A
• Explanation : The negative correlation of –1.0 between investment instruments A and B is lowest and therefore is most effective for portfolio diversification.