8 Correlation. As the financial manager of HighGrowth Ltd. you are considering the following three projects as potential investments. Your assistant has estimated the future net annual cash inflows for each project for each of the next five years as follows:

Expected net annual cash inflows (£000s)

Year 1 2 3 4 5 Project 1 10 15 12 14 18 Project 2 20 13 16 13 10 Project 3 30 45 36 42 54

(a) Identify which pairs of projects are positively correlated and which are negatively correlated.

(b) To achieve risk reduction which pairs of projects should be selected?