If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.
A) high; low
B) high; high
C) low; low
D) low; high

Question

Quizplus · Accepted Answer

The variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are high and the individual variability of each currency is high. This is because the high correlations will cause the currencies to move together, amplifying the effects of the individual variability.

If a Firm Repeatedly Borrows a Foreign Currency Portfolio, the Variability