Daniel blair recently joined a club, members of the club are generally quite conservative and are unwilling to invest in debt securities with credit ratings below AA. New investments are always evaluated in the context of the overall portfolio. based on the attributeds of the investment club members they will most likely pursue an investment strategy that: A attempt to reduce a portfolio’s tandard deviation through diversification. B seeks the lowerest risk securities Cattempt to eliminate standard deviation Dtries to totally eliminate systematic risk the correct answer is A. But, according to fixed income resarch, all high rating bonds are highly correlated. Thus, the diversified benefits should be lower.
What you write about high correlation between investment grade bonds may be true, but in this context, there are no other answers that could possibly be correct. Also, any time you are adding securities to a portfolio, the goal is to reduce the overall risk. Thus, I think that it should be clear that A is the best answer. What answer did you think it should be?
Couldn’t B be an answer here?
Not B because they accept AA so not just the “lowest” risk. ie while AA is low risk B would only be correct if they only accepted AAA / US Treasuries. AA does have some risk.
neagu.alexandru Wrote: ------------------------------------------------------- > Couldn’t B be an answer here? Be careful, The lowest risk security over the world is “risk free” asset , thus AAA US treasuries.
schjew Wrote: ------------------------------------------------------- > neagu.alexandru Wrote: > -------------------------------------------------- > ----- > > Couldn’t B be an answer here? > > > Be careful, The lowest risk security over the > world is “risk free” asset , thus AAA US > treasuries. For now!