When Investment Returns Are Less Than Perfectly Positively Correlated,the Resulting

question 15

Multiple Choice

When investment returns are less than perfectly positively correlated,the resulting diversification effect means that:

• A) making an investment in two or three large stocks will eliminate all of the unsystematic risk.
• B) making an investment in three companies all within the same industry will greatly reduce the systematic risk.
• C) spreading an investment across five diverse companies will not lower the total risk.
• D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
• E) spreading an investment across many diverse assets will eliminate some of the total risk.
• F) None of the above.

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Definitions:

Criterion-related Validity

The extent to which a measure is related to an outcome or criterion, testing how well one measure predicts an outcome for another measure.

Construct Validity

The extent to which a test measures what it claims to be measuring.

Construct Validity

The degree to which a test measures what it claims to be measuring, specifically the ability of a measurement tool to actually measure the theoretical construct it intends to measure.

Criterion-related Validity

The extent to which a test's scores correlate with another measure or outcome that it is theoretically expected to predict.