When Plotting the Risk/return Relationships for Possible Portfolios of Two

question 15

Multiple Choice

When plotting the risk/return relationships for possible portfolios of two securities, the lowest standard deviation of the portfolio possibilities would occur if the correlation coefficient were

• A) 0.
• B) -1.
• C) .5.
• D) 1.

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Definitions:

Rational Behavior

Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility. See rational.

Cognitive Biases

Systematic patterns of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.

Behavioral Economists

Experts in a field of economics that combines insights from psychology to understand how people make economic decisions.

Faulty Heuristics

Cognitive shortcuts that lead to errors in judgment or decision-making due to biases or flawed logic.