Assume You Are Considering Combining Two Investments to Form a Portfolio

question 52

Multiple Choice

Assume you are considering combining two investments to form a portfolio and you are very concerned with the risk that will result from the combination.If you want to attain the greatest effect from diversification, you would prefer that the assets are related.

• A)negatively
• B)positively
• C)not
• D)The relationship between the two investments gives no indication of the diversification effect that will result by combining them to form a portfolio.
• E)Diversification is not an important factor in investment decisions.

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Definitions:

Precommitments

Actions taken ahead of time that make it difficult for the future self to avoid doing what the present self desires. See time inconsistency and self-control problems.

Self-Control Problems

Self-control problems refer to situations where individuals struggle to resist short-term temptations in order to achieve long-term goals, often leading to impulsive behavior.

Time Inconsistency

The tendency for a person or group to change their plan or perspective over time in ways that can be counterproductive.

Preferences

Individual choices or tastes that determine the selection of goods and services over others based on factors like utility, convenience, or price.