While the Portfolio Return Is a Weighted Average of Realized

question 28

True/False

While the portfolio return is a weighted average of realized security returns, portfolio risk is not necessarily a weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.

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Definitions:

Crossover Rate

The rate at which the net present values of two projects are equal, often used in capital budgeting to compare projects.

Cost of Capital

The total cost of funds used for financing a business, including the cost of equity and debt.

IRR Method

The Internal Rate of Return (IRR) method is a financial analysis tool used to evaluate the profitability of potential investments by determining the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

Discounted Payback

The period of time it takes to recoup the initial cost of an investment, taking into account the time value of money.