The Covariance Between the Returns on Two Assets Is Negative

question 8

Multiple Choice

The covariance between the returns on two assets is negative. This occurs when ________.

• A) the variance of one asset has a negative linear relationship with the variance of the other asset
• B) the standard deviation of one asset has a positive linear relationship with the standard deviation of the other asset
• C) on average, the return on one asset is below its expected value and the return on the other asset is above its expected value
• D) on average, the return on one asset is below its expected value and the return on the other asset is below its expected value

---

Definitions:

Economic Efficiency

A state where resources are allocated in a way that maximizes the production of goods and services at the lowest cost.

Competitive Market Economy

An economic system where numerous buyers and sellers interact in the marketplace, with competition determining the price and quantity of goods and services.

Self-interest

The pursuit of personal gain or advantage, whether economic, psychological, or physical.

Command System

A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; socialism; communism. Compare with market system.