With respect to the risk / return graph: why is the shape of the graph a...

With respect to the risk / return graph: why is the shape of the graph a curve when the correlation is between -1 and 1? Why is it a straight line in the other two cases?
What happens to portfolio risk as you invest in more than one asset?
What happens to portfolio risk as the number of assets increase?

Expert Solution

When the correlation of two stocks will be -1, it will mean that those two stocks are perfectly negatively correlated and they will move in the opposite direction so show the shape of the graph is straight line.

Similarly when the correlation of two stock would be +1, it would mean that they are perfectly positively correlated, and they will move in the same direction so, shape of the graph is straight line.

When the correlation is between -1 and + 1, it would mean that the correlation is not perfectly correlated, so they will be in a shape of curve because they cannot be straight line as their movement would not be completely similar or completely opposite.

If there is just one asset, then the risk will be very high because all the risk will be related to the movement of one asset, but if the number of the Asset will increase there would be diversification benefit and the risk will decrease.

jeff jeffy answered 1 year ago

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