Assume the Correlation Coefficient Between the Return on the Existing

question 34

Multiple Choice

Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the 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

---

Definitions:

Direct Labour Hours

The overall work hours of staff directly engaged in creating products.

Variable Manufacturing Overhead

The portion of variable overhead that is directly associated with the manufacturing process, such as indirect materials or supplies.

Direct Material

Raw materials that are directly traceable and allocable to a finished product.

Material Purchase Price Variance

A reiteration, focusing on the deviation between the actual amount paid for material and the standard cost.