Question
Bonds A, B and C have the same standard deviation of the rates of return (A= B = C = 15%). The correlation coefficients between
Bonds A, B and C have the same standard deviation of the rates of return (A= B = C = 15%). The correlation coefficients between the returns of these securities are:
| Titre A | Titre B | Titre C |
Titre A | 1 |
|
|
Titre B | 0.65 | 1 |
|
Titre C | 0.30 | -0.85 | 1 |
If you build 3 portfolios as follows:
Portfolio 1: An equally weighted portfolio composed of securities A and B Portfolio 2: An equally weighted portfolio composed of securities A and C Portfolio 3: An equally weighted portfolio composed of securities B and C
Which of these portfolios has the lowest degree of risk? Justify your answer.
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