Question 1 (40 marks) You are considering investing in Assets A and B with the following returns and standard deviations (of return): c) Now suppose risk-free rate (rf) is zero. Suppose Assets A and B are perfectly positively correlated. Illustrate with a diagram as to why a rational investor would or would not hold Asset B in one's portfolio. [Hint: Can provide verbal support to the graph, if necessary, in no more than three lines.] (5 marks) d) Now suppose risk-free rate (rf) is zero. Suppose Assets A and B are perfectly negatively correlated. Form a 2-asset portfolio that has zero risk (i.e., standard deviation of return equals zero). [Hint: "What is the name of that portfolio?" => "To form a portfolio, what you need to determine?" => "How can you come up with the formula to find that portfolio? Can derive the formula yourself using the portfolio SD formula or find the formula you need from the Bodie.] (6 marks) Question 1 (40 marks) You are considering investing in Assets A and B with the following returns and standard deviations (of return): c) Now suppose risk-free rate (rf) is zero. Suppose Assets A and B are perfectly positively correlated. Illustrate with a diagram as to why a rational investor would or would not hold Asset B in one's portfolio. [Hint: Can provide verbal support to the graph, if necessary, in no more than three lines.] (5 marks) d) Now suppose risk-free rate (rf) is zero. Suppose Assets A and B are perfectly negatively correlated. Form a 2-asset portfolio that has zero risk (i.e., standard deviation of return equals zero). [Hint: "What is the name of that portfolio?" => "To form a portfolio, what you need to determine?" => "How can you come up with the formula to find that portfolio? Can derive the formula yourself using the portfolio SD formula or find the formula you need from the Bodie.] (6 marks)