Which of the Following Statements Is FALSE

question 77

Multiple Choice

Which of the following statements is FALSE?

• A)The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio.
• B)The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights.
• C)The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio.
• D)The volatility declines as the number of stocks in a portfolio grows.

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Definitions:

WACC

Weighted Average Cost of Capital, a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted.

Debt-Equity Ratio

A measure of a company's financial leverage, calculated by dividing its total liabilities by stockholders' equity, indicating the proportion of debt used in financing its assets.

After-Tax Cost of Debt

The net cost to a company for borrowing funds, calculated by subtracting the tax benefits of interest expenses from the total interest paid.

Cost of Equity

The Cost of Equity is the return a company requires to decide if an investment meets capital return requirements and is often used in financial analysis and valuing companies.