true or false 16. If the correlation coefficent between two stocks is 1, then an investor...

true or false

16. If the correlation coefficent between two stocks is 1, then an investor can signifcantly reduce risk by holding the two stocks in a portfolio.

18. Investors can reduce risk by holding more than one asset in a portfolio.

19. A nominal rate could best be described as

		the rate that tells you what you really earn on an annual basis
		The rate that you use in calculations
		Its hard to say exactly
		The stated rate that ignores compoundin
		The rate that if squared equals the periodic rate

Solutions

Expert Solution

Question 16

False. If the two securities are perfectly positively correlated, the two securities would not reduce the risk of the portfolio. Consider the mathematical relation:

A positive correlation coefficient implies standard deviation (risk) of the portfolio would increase and would be more than the weighted average of the risk of two securities.

Question 2

True. Investors can reduce risk by holding more than one asset in portfolio. This would reduce the unsystematic risk within the portfolio and diversify the investment. However, to have the best effect of diversification, the returns of two assets should not be correlated.

Question 3

Option 2- A nominal rate is the rate that we use in calculations.

Nominal Rate = Real rate + Inflation rate.

Option 1 is incorrect. This is not what we really earn. The return that we earn really is called as Real rate of Return.

Option 3 is incorrect.

Option 4 is incorrect. It can take compouding in consideration as well.

Option 5 is incorrect.

jeff jeffy answered 1 year ago

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