If Two Events Are Perfectly Negatively Correlated, Then

question 109

Multiple Choice

If two events are perfectly negatively correlated, then

• A)diversification can reduce but not eliminate risk.
• B)diversification can eliminate risk.
• C)diversification has no impact on risk.
• D)diversification cuts risk in half.

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Definitions:

Interest Rate Risk

The risk that the value of an investment will decrease due to a change in interest rates.

Average Duration

The weighted average time it takes for an investor to receive all cash flows from a bond or a portfolio of bonds, factoring in the present value of those cash flows.

Perpetuity

A type of annuity that lasts forever, providing payments that continue indefinitely.

Yield

The income return on an investment, expressed as a percentage of the investment’s cost or current market value.