Portfolio [3]

You can choose to invest in two shares, A and B:

E[r] a A 12.5% 15%

B 16% 20%

Plot, in a mean standard deviation diagram, expected return and standard deviation for portfolios with weights in A of 0, 0.25, 0.5, 0.75 and 1.0. Do this for correlations between the returns of A and B of —1 , 0 and +1 . What does this tell you about how diversification possibilities varies with covariances?