Assume You Currently Hold One Type of Security and Decide

question 14

Multiple Choice

Assume you currently hold one type of security and decide to construct a portfolio.Which of the following would provide the greatest degree of risk reduction?

• A) Adding a security that has perfect negative correlation with the one you are holding
• B) Doubling the quantity of the security you already hold
• C) Adding a positively, but not perfectly, correlated security
• D) Adding a security that is uncorrelated with your current one
• E) Adding a security that has perfect positive correlation with the one you are holding

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Definitions:

Marginal Rate

The amount of tax applied to an additional dollar of income, often used in the context of progressive tax systems.

Average Rate

A measure used in finance to represent the typical amount of return or rate over a given period.

Fixed Rate

An interest rate that remains constant over the lifetime of a loan or financial instrument.

Average Tax Rates

It reflects the fraction of total income that is paid in taxes, calculated by dividing the total amount of taxes paid by the total income.