Assume the Correlation Coefficient Between the Return on the Existing

question 45

Multiple Choice

Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns.

• A) decrease
• B) increase
• C) decrease or increase (depending on the exact size of the returns and standard deviations)
• D) None of these are correct.

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