In Order to Benefit from Diversification, the Returns on Assets

question 46

Multiple Choice

In order to benefit from diversification, the returns on assets in a portfolio must:

• A) be perfectly positively correlated.
• B) be perfectly negatively correlated.
• C) positively correlated but not perfectly.
• D) have the same idiosyncratic risks.

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Definitions:

Operating Cycle

The period it takes for a business to purchase inventory, sell products, and convert the sales back into cash, essentially measuring the time span from buying raw materials to receiving cash from sales.

Inventory Turnover Rate

A measure of how quickly a company sells and replaces its stock of goods within a given period, indicating the efficiency of its inventory management.

Opportunity Cost

The expense associated with foregoing the next most favorable option when a choice is made.