Question

When the correlation coefficient between two stocks is __________, holding these two stocks would not reduce risk.

        a.      greater than 0 but less than +1

        b.      greater than -1 but less than 0

c.      0

        d.      +1

        e.      -1

The present value of a future cash flow can be increased if (other things the same)

        a.      The discount rate is decreased.

        b.      The discount rate is increased.

        c.      The future cash flow is received earlier.

        d.      Both b and c above.

        e.      Both a and c above.

Answer 1

When the correlation coefficient between two stocks is +1 , holding these two stocks would not reduce risk.

Option d is correct.

Since if the correlation is exactly +1, standard deviation of portfolio will be weighted average standard deviation of stocks.

If correlation is less than 1, standard deviation of portfolio will be less than weighted average standard deviation of stocks.

The present value of a future cash flow can be increased if (other things the same)

        The discount rate is decreased.

The future cash flow is received earlier.

Therefore option e is correct.

        e.      Both a and c above.