Assume the Correlation Coefficient Between the Returns on the Existing

question 12

Multiple Choice

Assume the correlation coefficient between the returns on the existing project and the return on a proposed foreign project is 1.Also assume the returns on existing project and the new project are equal,and that the existing project has a lower standard deviation than the proposed project.Under this scenario,undertaking the proposed project will ___________ the variance of the firm's overall returns.

• A) decrease
• B) increase
• C) decrease or increase, depending on the exact size of the returns and standard deviations
• D) none of the above

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Definitions:

Interest Cost Component

The portion of pension expense that represents the increase in the projected benefit obligation due to the passage of time.

Projected Benefit Obligation

An estimate of the total amount an entity is obligated to pay in pension benefits, based on expected future salary increases.

Discount Rate

The interest rate used to discount future cash flows to present value, often used in the calculation of net present value or investment appraisals.

Service Cost

The portion of the expense of a pension plan that is attributed to the increase in pension benefits due to employee service in the current period.