Question
Consider portfolios made up of two possible assets, A and B, with expected returns and standard deviations summarized below: Asset E(r) (r) A 10% 25%
Consider portfolios made up of two possible assets, A and B, with expected returns and standard deviations summarized below:
Asset | E(r) | (r) |
A | 10% | 25% |
B | 8% | 25% |
(a) For a portfolio with 1/2 weight in each of the two assets, what correlation between the assets would make the portfolio standard deviation 25%, the same as the asset individually? (Show work)
(b) For a portfolio with 1/2 weight in each of the two assets, what correlation between the assets would make the portfolio standard deviation 12.5%, half the standard deviation for an individual asset? (Show work)
(c) For a portfolio with 1/2 weight in each of the two assets, what correlation would result in the lowest possible portfolio standard deviation? Given that correlation, what would be the standard deviation of the portfolio's return? (Show work)
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