When solving for the future value of a stream of unequal cash ...

[WWatsford]

When solving for the future value of a stream of unequal cash flows, it is important to add together the values BEFORE applying the future value formula to determine their future value.
 
  Indicate whether the statement is true or false.

Question 2

An investor is considering investing one-half of his wealth in Asset A and one-half in Asset B. He is not sure how the two assets are correlated. The correlation might be r = +1 or it might be r = -1.
 
  If it is r = + 1, then the portfolio standard deviation is 15. Calculate the portfolio standard deviation if the correlation is r = -1. What is the difference between the standard deviations of Scenario 1 and Scenario 2? (Scenario 1 - Scenario 2 )
 
   ASSET A ASSET A ASSET B ASSET B Correlation
  Scenario Expected Return Standard Deviation Expected Return Standard Deviation Correlation of A and B
  1 10 20 5 10 +1
  2 10 20 5 10 -1
 
  A) 2.5
  B) 5.0
  C) 7.5
  D) 10.0
  E) 15.0

[Sammyo]

Answer to Question 1

Answer: FALSE
Explanation: Apply the FV formula first and then add the cash flows.

Answer to Question 2

D

[WWatsford]

Gracias!

[mjenn52]

Excellent