Assume That You Own a Portfolio with a Known Average

question 150

Multiple Choice

Assume that you own a portfolio with a known average return and standard deviation. Which of the following stocks, if added to your portfolio, will not reduce its risk through diversification?

• A)A stock whose return is negatively correlated with that of your portfolio and has a lower standard deviation.
• B)A stock whose return is positively correlated with that of your portfolio and has a lower standard deviation.
• C)A stock whose return is positively correlated with that of your portfolio and has a higher standard deviation than your stock.
• D)All of the above will reduce the risk of your investment through diversification.
• E)None of the above will reduce the risk of your investment through diversification.

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Definitions:

Bad Debts Expense

An expense reported on the income statement reflecting the cost of estimated uncollectible accounts receivable.

Net Credit Sales

Sales made on credit minus any sales returns or allowances, reflecting the actual credit sales revenue.

Uncollectible Accounts

Debts owed to a company that are considered to be uncollectable and are therefore written off as a bad debt expense.

Estimated Uncollectible

An accounting term referring to the portion of accounts receivable that a company does not expect to collect.