Nama : Ratna Cahyaning Utami

NIM : 20.05.51.0236

1. Explain the following statement: “An asset held as part of a portfolio is generally less risky
than the same asset held in isolation.”
Answer: True an asset is less risky held in a portfolio because risk is diversified.

2. What is meant by perfect positive correlation, perfect negative correlation, and zero
correlation?
Answer:
- Perfectly correlation: (p=1.0) the returns of two stocks perfectly correlated would
result is diversification being useless, stocks move up and down with each other
and are just as risky as if each stock was held alone
- Perfect negative correlation: (p=-1.0) all risk can be diversified away between two
stocks
- Zero correlation: returns of two stocks are not rated to one another

3. In general, can the risk of a portfolio be reduced to zero by increasing the number of
stocks in the portfolio? Explain.
Answer: No. As stock is added, risk declines at decreasing rate. After 40-50 stocks,
additions will do little to bring down the risk. Diversifiable risk goes down with additional
stock. Market risk remains even if all stocks are included in a portfolio.

4. What are the two major types of tests that have been performed to test the validity of
the CAPM? (Beta stability; slope of the SML) Explain their results.
5. Are there any reasons to question the validity of the CAPM? Explain.