1. Which of the following statements about the bundling risks into portfolios is not correct?
A) Due to the randomness of business activity bundling risks into portfolios will be reducing risk.
B) Natural diversification occurs across uncorrelated risks that are bundled into a portfolio.
C) Bundling risk into a portfolio only reduces risk if uncorrelated and/or negatively correlated exposures are included.
D) The best reduction in risk is accomplished by including negatively correlated exposures into a portfolio.
2. Travel Inn Express spends $149,000 a week to pay bills and maintains a lower cash balance limit of $175,000. The standard deviation of the disbursements is $14,400. The applicable weekly interest rate is .039 percent and the fixed cost of transferring funds is $18. What is the inn's cash balance target based on the Miller-Orr model?
1. $228,492.97
2. $181,359.09
3. $194,289.96
4. $156,359.70
5. $205,118.80