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3. Here are some characteristics of two securities: Security 1 R = .10 = .0025 Security 2 R2 = .16 = .0064 Answer the
3. Here are some characteristics of two securities: Security 1 R = .10 = .0025 Security 2 R2 = .16 = .0064 Answer the following questions: (a) Which security should an investor choose if she wants to (i) maximize expected returns, (ii) minimize risk (assume the investor cannot form a portfolio)? (b) Suppose the correlation of returns on the two securities is +1.0, what is the optimal combination of securities 1 and 2 that should be held by the investor whose objective is to minimize risk (assume short sales are not allowed)?
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