If the Correlation Between Two Stocks Is +1,then a Portfolio

question 33

Multiple Choice

If the correlation between two stocks is +1,then a portfolio combining these two stocks will have a variance that is:

• A) less than the weighted average of the two individual variances.
• B) greater than the weighted average of the two individual variances.
• C) equal to the weighted average of the two individual variances.
• D) less than or equal to average variance of the two weighted variances, depending on other information.
• E) None of these.

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Definitions:

Default Rate

The frequency at which borrowers fail to make scheduled payments on loans or securities.

Credit Policy

A set of guidelines that a company uses to determine the credit terms and conditions for its customers.

Economic Order Quantity

is a formula used by businesses to determine the optimal amount of inventory to order at one time, aiming to minimize holding and ordering costs.

Variable Cost

Costs that vary directly with the level of production or service delivery.