17. A firm is considering diversify into another line of business. The opportuni

Question

17. A firm is considering diversify into another line of business. The opportunities available have about the same expected returns, and the firm is interested in lowering its overall risk. The investments and their correlation coefficients are listed below. Which should the firm choose? A. cooper mines, +0.3 B. machinery construction, +0.5 C. toy manufacturing, + 0.7 D. janitorial services, 0 18. In general, risk the number of portfolio components. A. market, declines, larger B. nonsystematic, declines, larger C. nonsystematic, rises, larger D. market, declines, smaller

Explanation / Answer

answer 17 correct answer is D, If correlation is zero it means Returns of the two assets are uncorrelated. Movement of Asset 1 provides no prediction regarding the movement of Asset 2

Answer 18 correct answer is B, In general Non systematic risk decline with the larger number of portfolio component.Investors are capable of avoiding nonsystematic risk through diversification by forming a portfolio of assets that are not highly correlated with one another.

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