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Consider the portfolio consisting of risky asset X and risky asset Y. The following chart plots the portfolio possibilities curve when risky assets X and
Consider the portfolio consisting of risky asset X and risky asset Y. The following chart plots the portfolio possibilities curve when risky assets X and Y are perfectly positively correlated, i.e. XY=1 (curve XNY ); and the portfolio possibilities curve when risky assets X and Y are perfectly negatively correlated, i.e. XY=1 (curve XMY ) in the expected return standard deviation space. Relationship between expected return and standard deviation for various correlation coefficients The standard deviation of the portfolio consisting of risky assets X and Y is: P=(wX2X2+(1wX)2Y2+2wX(1wX)XYXY)21 where wX denotes the fraction of investor's funds invested in asset X. Explain why all portfolios of risky asset X and risky asset Y should lie within the shaded area XNYMX if 1
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