The Diversification Effect of a Portfolio of Two Stocks

question 52

Multiple Choice

The diversification effect of a portfolio of two stocks:

• A) increases as the correlation between the stocks declines.
• B) increases as the correlation between the stocks rises.
• C) decreases as the correlation between the stocks rises.
• D) Both increases as the correlation between the stocks declines; and decreases as the correlation between the stocks rises.

---

Definitions:

Statement of Cash Flows

This document details the combined amount of cash a business gains from its day-to-day operations and outside investments, and the cash it expends on operating and investing activities over a particular period.

Indirect Method

A method of calculating cash flows from operating activities in the cash flow statement by adjusting net income for changes in non-cash accounts.

Investing Activities

Transactions involving the purchase and sale of long-term assets and other investments not considered cash equivalents.