The Correlation Between the Return on the Risk-Free Asset and the Return

question 140

Multiple Choice

The correlation between the return on the risk-free asset and the return on a risky asset is always:

• A)-1
• B)0
• C)1
• D)0.5

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Definitions:

Speculative Forward Contract

A financial derivative used to speculate on the future price of an asset, involving an agreement to buy or sell the asset at a future date for a price determined today.

Fair Value Hedge

A risk management technique that uses financial instruments to mitigate the risk associated with changes in the fair value of an asset or liability.

Firm Commitment

An agreement between a buyer and an underwriter in which the underwriter guarantees the sale of a certain amount of securities.

Cash Flow Hedge

A hedging strategy used to manage risk associated with variability in cash flows, typically related to interest rates or currency exchange rates.