Two Assets Whose Returns Move in the Same Direction and Have

question 6

True/False

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are both very risky assets.

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Definitions:

Maturity

The time at which the principal or final payment of a financial instrument, such as a bond or loan, is due to be paid in full.

Interest Rate

The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal, typically on an annual basis.

Compensating Balance

A minimum account balance that a company agrees to maintain in a bank account, often to qualify for favorable terms on a loan from the bank.

Effective Rate

The interest rate on a loan or investment, adjusted for the compounding period, providing a true reflection of financial costs or returns.