1. Other things equal, diversification is most effective when (Single Choice) securities' returns are uncorrelated. securities' returns are positively correlated securities' returns are high securities' returns are negatively correlated securities returns are positively correlated and high 2. Which of the following is not a source of systematic risk? (Single Choice) The business cycle Interest rates Personnel changes The inflation rate Exchange rate 3. Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance (Single Choice) 0.038 0.070 0.018 0.033 0.054