Consider a Portfolio with a Known Average Return and Standard

question 142

Multiple Choice

Consider a portfolio with a known average return and standard deviation. Which of the following stocks, if added to the portfolio, will reduce its risk through diversification?

• A) A stock whose return is perfectly negatively correlated with the portfolio's return
• B) A stock whose return is perfectly positively correlated with the portfolio's return
• C) A stock whose return has zero correlation with the portfolio's return
• D) Any stock added to a portfolio will reduce its risk regardless of its correlation with the portfolio

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Definitions:

Comparative Balance Sheets

Financial statements that present the financial position of a company at different points in time, side by side, to facilitate comparison.

Allowance Method

An accounting technique used to estimate and record bad debts expense by anticipating uncollectible accounts.

Note Receivable

A financial asset representing a written promise to receive a specific amount of money at a future date.

Dishonored Note

A promissory note that has not been paid by the maker at the time of maturity, resulting in default.