Question: (Correlation, Diversification, Risk and Return) Use the following risk and return value to calculate the risk and return behavior for various combinations of assets A and B under different degrees of correlation:
|
Asset
|
Expected
return k
|
Risk
(standard deviation), s
|
|
A
|
8%
|
5%
|
|
B
|
13%
|
10%
|
(a). If the returns of assets A and B are perfectly positively correlated, describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
(b) If the returns of assets A and B are perfectly negatively correlated, describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.