Maximum Diversification Benefit Can Be Achieved If One Were to Form

question 141

Multiple Choice

Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose returns had a correlation coefficient of:

• A) -1.0
• B) +1.0
• C) 0.0
• D) none of the above

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Definitions:

Annuity Due

A type of annuity whose payment is due immediately at the beginning of each period, as opposed to at the end, typical for retirement funds and insurance payouts.

Future Value

The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today, often calculating the effects of interest.

Equal Annual Installments

A method of repaying a loan in which the borrower pays the lender the same amount of money each year until the loan, including interest, is fully paid off.

Compounded Monthly

Interest on an investment or loan calculated on a monthly basis, where the interest earned each month is added to the principal, and future interest is based on this new amount.