2. Portfolio theory (25 points) Use the formulas for the volatility of a two-asset portfolio from the book or slides. Show (use the proper statistical vocabulary!) that diversification can reduce the risk of a portfolio without affecting the returns. (Hint: Use the specific mathematical term -part of the formula - that proves diversification works.) What is the best theoretical choice for the two assets? Once you have proved the concept with formulas, use your own words to explain how diversification works. (max 4-5 lines).