Combining Two Assets Having Perfectly Negatively Correlated Returns Will Result

question 51

Multiple Choice

Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________.

• A) remains unchanged
• B) decreases to a level below that of either asset
• C) increases to a level above that of either asset
• D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk

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Definitions:

M&M Proposition I

A theory stating that, in a perfect market, the value of a firm is unaffected by how it is financed, regardless of the debt-to-equity ratio.

Capital Structure

Refers to the way a corporation finances its assets through a combination of equity, debt, or hybrid securities.

M&M Proposition I

Modigliani and Miller's principle suggesting the irrelevance of financial leverage on a company's valuation in an ideal market.

Debt-Equity Ratio

A calculation of a firm's financial leverage determined by dividing its overall liabilities by the equity of its shareholders.