If the Correlation Between Two Stocks Is +1, Then a Portfolio

question 34

Multiple Choice

If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is:

• A)less than the weighted average of the two individual variances.
• B)greater than the weighted average of the two individual variances.
• C)equal to the weighted average of the two individual variances.
• D)less than or equal to average variance of the two weighted variances, depending on other information.
• E)None of the above.

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Definitions:

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them back to the present day, used in capital budgeting to assess the profitability of an investment.

Compound Interest

Interest that is computed not only on the original amount deposited or borrowed but also on the interest that has been added to the principal over past periods.

Capital Investment

Funds invested in a firm or enterprise for the purpose of furthering its business objectives, such as purchasing long-term assets.

Estimated Life

The expected period over which an asset is useful to the owning entity and can generate revenue, used for calculating depreciation.