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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Definitions:

Parallel

In psychology, parallel play refers to a stage of development in children where they play alongside other children without directly interacting with them, a concept often used to describe certain social behaviors.

Incessantly

Continuing without interruption; unending, often in an annoying or undesired way.

Composition

A term referring to the arrangement or makeup of something's parts or elements, often used in contexts ranging from music to writing, and to the chemical makeup of substances.