Asset A offers an expected rate of return of 10% with a standard deviation of 25%. Asset B offers

an expected rate of return of 5% with a standard deviation of 30%. Assume that the risk-free

interest rate is zero.

(a) Given that risk and return data of the two assets, would anyone choose to hold Asset B?

Explain your answer graphically.

(b) Show with calculations that there is NO diversification benefit resulting from forming the

portfolio.

(c) Suppose Assets A and B are perfectly positively correlated. Draw a graph illustrates why a

rational investor would or would not hold Asset B in ones portfolio. [Hint: Can provide verbal

support to the graph, if necessary, in no more than two lines.]

(d) Suppose Assets A and B are perfectly negatively correlated, form a 2-asset portfolio that has

zero risk (i.e., standard deviation of return equals zero).