General Studies · Portfolio Risk Management
The covariance between two assets in a portfolio is positive and high. If an investor adds a third asset with a negative beta to this portfolio, what is the most likely impact on systematic risk, assuming the market is efficient and CAPM holds?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Systematic risk decreases as the negative beta hedges against broad market movements✓
- 2Unsystematic risk is amplified while systematic risk remains completely unchanged
- 3Total risk rises significantly because of increased volatility from the negative correlation
- 4Systematic risk increases due to diversification failure
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Systematic risk decreases as the negative beta hedges against broad market movements
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