Portfolio Risk

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.

1. Calculate the portfolio standard deviation (volatility) of returns. Show your work.
2. If the correlation of returns was negative 20%, i.e., -20%, what is the portfolio standard deviation (volatility) of returns? Show your work.
3. Did risk increase or decrease when the correlation declined from 20% to -20%? Why? Briefly explain your answer using non-mathematical terminology.