Assume the Correlation Coefficient Between the Return on the Existing

question 19

Multiple Choice

Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns.

• A) decrease
• B) increase
• C) decrease or increase, depending on the exact size of the returns and standard deviations
• D) none of the above

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Definitions:

Product Differentiation

The attempt by firms to convince buyers that their products are different from those of other firms in the industry. If firms can so convince buyers, they can charge a higher price.

Perfectly Elastic

A situation in economics where the quantity demanded or supplied changes by an infinite amount in response to any change in price; depicted by a horizontal line in price-quantity graphs.

Collusion

Cooperation among producers to limit production and raise prices so as to raise one another’s profits.

Barriers To Entry

Barriers to entry are obstacles that make it difficult for new competitors to enter an industry, including high initial investment costs, strict regulations, or strong brand loyalty among existing customers.