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Math Help - Business Stats Q

  1. #1
    Senior Member sfspitfire23's Avatar
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    Business Stats Q

    Hey guys,

    It is possible to combine two risky securities (high standard deviation of return) into a portfolio and produce a situation where the expected return is zero? If this portfolio had a standard deviation of returns equal to zero, would it be a portfolio with zero risk?



    appreciate any input!
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  2. #2
    Junior Member
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    It should be possible if you're considering two securities, with each a few standard deviations away from the mean return (but in equal and opposite directions of each other). The movement in each should, on average, offset each other and make the expected return 0.

    It is not possible to get rid of all risk in a portfolio, you can only minimize it as best as possible. There's your investment risk, then there's systematic risk. The investment risk can be minimized through diversification but the systematic risk cannot, in a general sense, be diversified away from. For example, no diversification of investment can reduce the risk of you losing money due to a planet killing asteroid striking the earth, until we move to other planets of course...
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