The Variance of a Security's Return Will Be Reduced If

question 17

Multiple Choice

The variance of a security's return will be reduced if in a two-factor model

• A) there is a negative sensitivity to an increasing factor.
• B) the forecasted change in a factor is large.
• C) the covariance between the two factors is large and positive.
• D) there is a large random error variance.

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds.

Debt/Equity Ratio

A financial metric showing the balance between the amount of equity provided by shareholders and the debt incurred to support a company's assets.

Cost of Borrowing

The total expense incurred by an entity for borrowing funds, including interest payments, fees, and other charges.

Book Value Per Share

A financial measure that represents a per share assessment of the minimum value of a company's equity.