If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm's existing assets,then the company's total exposure to risk can decrease.

Question

Quizplus · Accepted Answer

If the cash flows of the investment project are negatively correlated with the average cash flow of the existing assets, it means that the investment project has a tendency to perform well when the existing assets are not performing well, and vice versa. As a result, the company's overall risk exposure can decrease as the negative correlation helps to balance out the effects of market fluctuations on the cash flows.

If the Cash Flows of an Accepted Investment Project Are