medium · FRM Part 1 Foundations of Risk Management
In the context of Modern Portfolio Theory, if an investor adds a risky asset to their portfolio that is perfectly negatively correlated (ρ = -1.0) with their existing holdings, what is the primary risk-management implication?
- The portfolio will necessarily move onto the Capital Market Line.
- Systematic risk is increased because of the volatility of the new asset.
- The expected return of the portfolio will decrease to the risk-free rate.
- Portfolio variance can be reduced to zero by choosing specific weights.
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