Assume Two Securities Are Negatively Correlated

question 86

Multiple Choice

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be

• A)equal to the standard deviation of the overall market.
• B)equal to the arithmetic average of the standard deviations of the individual securities.
• C)equal to zero.
• D)less than the weighted average of the standard deviations of the individual securities.
• E)equal to or greater than the lowest standard deviation of the two securities.

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Definitions:

Net Income

The company's net income following the deduction of all costs and taxes from the total income.

Income Summary

An account to which the revenues and expenses are transferred in order to close the books; it reflects the net income or loss at the end of a period.

Owner's Capital Account

An account on a company's balance sheet that represents the owner's investment and retained earnings in the business.

Credit Balance

This represents the amount that a company or individual owes to creditors; in accounting, it indicates a balance on the right side of a ledger.