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

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Definitions:

Marginal Tax

The additional tax paid on an additional dollar of income, used in progressive tax systems to tax higher incomes at higher rates.

Proportional

A relationship or ratio between two quantities where they change at the same rate.

Tax Rate

The proportion of income that a person or business must pay in taxes.

Digressive

Characteristics of a process or system that decreases in intensity or rate as it progresses.