Assume You Are Considering Combining Two Investments to Form a Portfolio

question 11

Multiple Choice

Assume you are considering combining two investments to form a portfolio and you are very concerned with the risk that will result from the combination. If you want to attain the greatest effect from diversification, you would prefer that the assets _____.

• A) are negatively related
• B) are positively related
• C) are not related
• D) have a negative coefficient of variation
• E) have a positive coefficient of variation

---

Definitions:

Value In Use

The value today of the cash flows that are expected to come from an asset or a revenue-producing entity in the future.

Impairment Loss

A reduction in the recoverable value of an asset below its carrying amount on the balance sheet, recognized as a loss.

Recoverable Amount

The higher value between an asset's fair value minus costs of disposal and its value in use.

Carrying Amount

The amount at which an asset or liability is recognized on the balance sheet after deducting any accumulated depreciation, amortization, or impairment.