As Long as Returns Among Various Financial Instruments Are Not

question 16

Multiple Choice

As long as returns among various financial instruments are not perfectly correlated, diversification _______ risk for any given expected return.

• A)increases
• B)reduces
• C)has no impact on
• D)indifferently affects

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Definitions:

Effective Annual Interest Rate

The effective annual interest rate considers the effects of compounding, providing a true reflection of the annual cost of borrowing over a year.

Compounded Monthly

Compounded monthly refers to the way interest is calculated on an investment or loan, with the interest added to the principal each month so that subsequent interest is earned on an increasingly larger base.

Annual Percentage Rate

The annual percentage rate (APR) is the yearly interest rate charged on borrowed money, including any fees or additional costs, providing a comprehensive cost measure.

Interest Per Month

The amount of interest payable each month on a loan, mortgage, or any other financial obligation that incurs interest.