Question
Assume A portfolio consists of two assets, Investment A and Investment B. Market Value of Investment A at beginning of period: $600 Market Value of
Assume
A portfolio consists of two assets, Investment A and Investment B.
Market Value of Investment A at beginning of period: $600
Market Value of Investment B at beginning of period: $300
Investment A has an expected return of 8%
Investment B has an expected return of 3%
Investment A has a standard deviation (volatility) of returns 15%
Investment B has a standard deviation (volatility) of returns of 6%
The correlation of returns for Investment A and Investment B is 20%
Deliverable
Word or Excel spreadsheet items.
A. Calculate the portfolio standard deviation (volatility) of returns. Show your work.
B. If the correlation of returns was negative 20%, i.e., -20%, what is the portfolio standard deviation (volatility) of returns? Show your work.
C. Did risk increase or decrease when the correlation declined from 20% to -20%? Why? Briefly explain your answer using non-mathematical terminology.
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