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# Correlations, covariance, capitalizing, budget tools and NPV

83 In which of the following situations would you get the largest benefit from diversifying your investment across two stocks?
a. there is perfect positive correlation.
b there is perfect negative correlation.
c. there is modest positive correlation.
d. there is modest negative correlation.
e. there is not correlation.

84 While the covariance can very between vary large positive and negative numbers, the correlation coefficient varies only between
a. -1 and 0
b. 0 and +1
c. -1and +1
d. 0 and 10
e. None of the above

85 Regarding expensing an asset's cost immediately versus capitalizing the cost and depreciating it over time: All else the same, given a choice, a tax paying firm would generally prefer to
a. Capitalize the cost and depreciate, because this
will make the current year's net income higher.
b. capitalize the cost and depreciate, because it is
best to extend the depreciation tax shield into the
future as much as possible.
c. expense the asset to capture the tax shield
immediately and thereby maximize the present
value of the tax shield.
d. expense the asset to maximize the current year's
net income.
e. none of the above.

87 A capital budgeting decision tool, such as NPV, IRR, etc. should consider (use)
a. all of the relevant cash flows
b. only some of the relevant cash flows
c. only the opportunity costs
d. only the operating cash flows

88 One needs an interest rate to be able to calculate an IRR.
A. true
b. false

89 One needs an interest rate to be able to calculate an NPV.
A. true
b. false

90 If an investment has an NPV =0, then
a. this means the investor earned no money
b. this means the investor earned more than the required rate of return (i.e., cost of capital)
c. this means the investor earned less than the required rate of return (i.e., cost of capital)
d. this means the investor earned a return just equal to the required rate of return (i.e. the cost of capital rate at which the NPV was calculated)

#### Solution Preview

83 In which of the following situations would you get the largest benefit from diversifying your investment across two stocks?

b there is perfect negative correlation.

84 While the covariance can vary between vary large positive and negative numbers, the correlation coefficient varies ...

#### Solution Summary

Response discusses correlations and covariance

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