Explain the Relationship Between the Correlation of Payoffs and the Risk

question 4

Essay

Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.

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Definitions:

Total Revenues

The sum of all earnings generated by a business through its operations and activities.

Quantity Sold

The total number of units of a product or service that have been sold in a specified period.

Price Per Unit

The cost assigned to a single unit of a product or service, indicating how much a consumer will pay for one unit.

Payable

Amounts owed by a company to its creditors or suppliers that are due to be paid within the near future.