When Two Risky Securities That Are Positively Correlated but Not

question 33

Multiple Choice

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

• A) The portfolio standard deviation will be greater than the weighted average of the individual security standard deviations.
• B) The portfolio standard deviation will be less than the weighted average of the individual security standard deviations.
• C) The portfolio standard deviation will be equal to the weighted average of the individual security standard deviations.
• D) The portfolio standard deviation will always be equal to the securities' covariance.
• E) None of these are true.

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Definitions:

Common Stock

A type of equity ownership in a corporation, where holders have voting rights and potentially receive dividends.

Capital Surplus

funds raised by a company through issuing shares at a price above their par value.

Marginal Tax Rates

The rate of tax applied to your next dollar of income, indicating the percentage of tax imposed on additional income.

Interest Income

Earnings generated from assets that pay interest, such as savings accounts, bonds, and loans.