The Diversification Effect of a Portfolio of Two Stocks

question 27

Multiple Choice

The diversification effect of a portfolio of two stocks:

• A) increases as the correlation between the stocks declines.
• B) increases as the correlation between the stocks rises.
• C) decreases as the correlation between the stocks rises.
• D) Both increases as the correlation between the stocks declines; and decreases as the correlation between the stocks rises.
• E) None of these.

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Definitions:

Marginal Cost

The increment in sum total cost that comes with the production of an additional single unit of a good or service.

Marginal Revenue

The boost in revenue achieved by selling an additional unit of a good or service.

Price Taker

A buyer or seller that is unable to influence the market price of a product or service.

Marginal Revenue Curve

A graphical representation showing how the revenue from selling one more unit of a good or service changes as production volume changes.