( 73% Back BT321_Fall2021_PS2.pdf Question #2 (10 points) Consider the following two assets. Returns on asset 1 has a mean of ui and standard deviation of 01. Returns on asset 2 has a mean of up and standard deviation of 02. The correlation coefficient P1.2 measures how the two assets' returns are correlated, and it takes on values between -1 and +1. An investor puts W fraction of her wealth into stock 1, and W2 = 1- W fraction of her wealth into stock 2. 1. Using the equation on the standard deviation of portfolio returns, argue that the portfolio risk is in- creasing in P1,2. 2. When P1,2 = 1, argue using mathematical formulas that the portfolio standard deviation is equal to the weighted average of the standard deviation of the individual stocks in the portfolio. (Hint, Square of Summation). 3. Now suppose P1,2 = -1. If the investor wants to minimize her risk in investing in this portfolio, how should she choose Wand W2 = 1-W? (Hint, Square of Difference). ( 73% Back BT321_Fall2021_PS2.pdf Question #2 (10 points) Consider the following two assets. Returns on asset 1 has a mean of ui and standard deviation of 01. Returns on asset 2 has a mean of up and standard deviation of 02. The correlation coefficient P1.2 measures how the two assets' returns are correlated, and it takes on values between -1 and +1. An investor puts W fraction of her wealth into stock 1, and W2 = 1- W fraction of her wealth into stock 2. 1. Using the equation on the standard deviation of portfolio returns, argue that the portfolio risk is in- creasing in P1,2. 2. When P1,2 = 1, argue using mathematical formulas that the portfolio standard deviation is equal to the weighted average of the standard deviation of the individual stocks in the portfolio. (Hint, Square of Summation). 3. Now suppose P1,2 = -1. If the investor wants to minimize her risk in investing in this portfolio, how should she choose Wand W2 = 1-W? (Hint, Square of Difference)