week 7

Question 1

what is a way for investors to reduce risk?

Answer 1

investors can reduce risk by diversification and it is easy for them to diversify by combining the shares of many companies in a portfolio.

Question 2

a rational risk-averse investor will

Answer 2

hold a well-diversified portfolio and that the risk of an asset in a large portfolio depends on the covariance of the returns on the individual asset with the returns on the portfolio.