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Mr. Tippie invests 60% of his funds in stock I and the balance in stock J. The standard deviation of stock I is 10%, the

Mr. Tippie invests 60% of his funds in stock I and the balance in stock J. The standard deviation of stock I is 10%, the standard deviation of stock J is 20%. Find the volatility of his portfolio assuming:

A) A correlation of 1.0

B) A correlation of 0.5.

C) A correlation of 0.

D) A correlation of -0.5.

E) A correlation of -1.0.

What do you find? In each case, quantify the risk-reducing effect of diversification. How is the diversification benefit related to the size of the correlation coefficient?

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