8. rules of 2 hisky assets The following is focused on the importance of diversification. [12 points] a. Define correlation coefficient in formula terms. Discuss the potential value of the coefficient and why it is a good measure of the relationship between two securities or sectors. b. Given the following information on a two risky-asset portfolio, i. discuss the three rules using words and formulae and ii. use the data in the table [shown below] to calculate A. expected return, B. C. E[Rbonds] 5.0% variance and standard deviation of the rate of return on the portfolio Obonds 8.0% E[Rstocks] 12% Ostocks 20% P [correlation coeff] 0.30 Portfolio composition: 35% invested in stocks and the remainder in risky bonds

8. he following is focused on the importance of diversification. [12 points] a. Define correlation coefficient in formula terms. Discuss the potential value of the coefficient and why it is a good measure of the relationship between two securities or sectors. b. Given the following information on a two risky-asset portfolio. i. discuss the three rules using words and formulae and ii. use the data in the table [shown below] to calculate A. expected return. B. variance and C. standard deviation of the rate of return on the portfolio - Portfolio composition: 35% invested in stocks and the remainder in risky bonds