Increasing the Amount of Wealth in Asset a Whilst Maintaining

question 53

Multiple Choice

Increasing the amount of wealth in Asset A whilst maintaining the entire wealth invested in a portfolio consisting of two assets only,A and B (assume that the expected return and standard deviation of both assets are A: 0.10 and 0.03,and B: 0.15 and 0.05,respectively) :

• A)will increase the expected return of the portfolio.
• B)may reduce the variance of the portfolio regardless of the correlation coefficient between Assets A and B
• C)will decrease the expected return of the portfolio,but the expected return will be closer to 15% than before.
• D)will decrease the expected return of the portfolio,but the expected return will still be greater than if the portfolio consisted of Asset A only.

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Definitions:

Internal Rate Of Return

A metric used in capital budgeting to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows equal to zero.

Salvage Value

The projected final worth of an asset at the end of its period of use.

Operating Costs

The expenses related to the day-to-day activities of a business, such as wages and rent.

After-Tax Discount Rate

The discount rate used in financial analysis that reflects the net cost or benefit of investment after accounting for taxes.