#### Question Details

Description

The Question

A firm has a piece of land that was unused, but plans to build a new office complex on it in a new capital project. The market value of the land should be considered as a component of project cash flows provided that the land:

• has identifiable market value as it is an opportunity cost.
• has been fully depreciated as the market value a sunk cost.
• has the same market value as the book value.
• can be depreciated going forward.

The variance for CORPORATION A?s stock is 3.6%; the variance for CORPORATION B?s stock is 14.4%. What?s the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocks? returns is 0?

A. Variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.

B. Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification.

C. Variance of the portfolio increases as the correlation between the stock returns declines, which means a larger degree of diversification.

D. Variance of the portfolio increases as the correlation between the stock returns declines, which means less diversification.

How would your answer to the last question change if the correlation coefficient changes?

1) Variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.

2) Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification.

3) Variance of the portfolio increases as the correlation between the stock returns declines, which means a larger degree of diversification.

4) Variance of the portfolio increases as the correlation between the stock returns declines, which means less diversification.

#### Solution details

Solution #00070266

This paper was answered on 14-Oct-2020

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Oct 14, 2020

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