Which of the Following Statements Is True

question 5

Multiple Choice

Which of the following statements is true?

• A)If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently exactly estimates the risk of the whole portfolio.
• B)If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently underestimates the risk of the whole portfolio.
• C)If many loans have positive correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio.
• D)If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio.

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Definitions:

NPV Rule

A principle stating that an investment should be made if its net present value is positive, as it's expected to add value to the firm.

IRR Rule

A decision-making tool used in finance to evaluate investments, stating that a project is acceptable if its internal rate of return exceeds a predetermined threshold.

Internal Rate

NO. However, closely related term Internal Rate of Return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments.

Present Value

The value today of a sum promised at a specified time in the future given a rate of interest. The amount that would have to be deposited today at the specified interest rate to grow into the promised sum on the specified date.