Two Assets Have a Coefficient of Correlation of -

question 77

Multiple Choice

Two assets have a coefficient of correlation of -.4. Asset A has a standard deviation of 20% and asset B has a standard deviation of 40%. Relative to holding a portfolio consisting of 100% of Asset B, what happens to risk if you combine these assets into a 50-50 weighted portfolio?

• A) Combining these assets will increase risk.
• B) Combining these assets will have no effect on risk.
• C) Combining these assets may either raise or lower risk.
• D) Combining these assets will reduce risk.

---

Definitions:

Consolidated Financial Statements

Financial statements that combine the financial information of a parent company and its subsidiaries into one document.

Non-controlling Interest

A minority ownership in a subsidiary that is not large enough to exert control over the company, reflected within the equity section of the consolidated financial statements.

Consolidated Equity

The total amount of owners' equity represented in a consolidated financial statement, which reflects the combine equity of a parent company and its subsidiaries.

Non-controlling Interest

The portion of equity in a subsidiary not owned by the parent company, also known as minority interest.