Question

Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: Perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table:

Asset V: Expected Return: 8% Risk: 5%

Asset W: Expected Return: 13% Risk: 10%

a. If the returns of assets V and W are perfectly positively correlated(coefficient =+1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations

b. If the returns of assets V and W are uncorrelated (coefficient =0), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations

c. If the returns of assets V and W are perfectly negatively correlated(coefficient =-1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations

Answer 1