Dear Readers,

As part of our continuous effort to educate everyone on financial analysis, risk management and financial modeling, we have started a new series.

We will be posting a question relevant to either Chartered Financial Analyst (CFA) or Financial Modeling (FM) or Financial Risk Management (FRM). Question of the Day (QotD) will be posted every alternate day on the blog, the answer of the question will be declared the next day along with the next question.

Readers are encouraged to test and hone their knowledge using this series.

Without further delay, here is the first QotD of the series

Which of the following is most likely correct about a minimum variance portfolio?

  1. A minimum variance portfolio has a standard deviation which is lower than the standard deviation of each of the individual component assets.
  2. With an increase in the correlation coefficient between two asset classes, the standard deviation of the Portfolio reduces.
  3. The minimum variance of a perfectly correlated portfolio between the stocks and bonds is lower than the standard deviation of the bond.