The Creation of a Portfolio by Combining Two Assets Having

question 91

True/False

The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset. On the other hand, a portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

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Definitions:

Interest Rate

The percentage at which interest is paid by a borrower for the use of money they borrow from a lender, typically expressed as an annual percentage rate.

Research and Development

The investigative activities a business conducts to improve existing products and procedures or to lead to the development of new products and procedures.

Expected-Rate-of-Return Curve

A graphical representation that illustrates the relationship between the expected return of an investment and its associated risk.

Interest-Rate Cost-of-Funds Curve

A curve that illustrates the relationship between the interest rates on loans or deposits and the total amount of funds borrowed or lent.