question 2

Investments X and Y have the following information:

Economic Scenario	Probability	Returns: X	Returns: Y
Worst outcome	20%	5%	7%
Most likely outcome	60%	15%	14%
Best outcome	20%	25%	21%

Assume that investment X makes up 40% of the value of the portfolio and investment Y is 60%

A. Calculate the portfolios risk for a perfectly positive correlation coefficient.

B. Calculate the portfolios risk for a perfectly negative correlation coefficient.

C. Use your calculations in parts (A) and (B) to explain why correlation is important to take into account when constructing a portfolio