You have been told that you can create two portfolios one consisting of assets A and B and other consisting of assets A and C by investing equal proportions (50%) in each of the component assets . The correlation between asset A and B is -1 and between A and C is +1 Using the above table

a) Calculate the return for each portfolio. calculate the standard deviation for each portfolio. explain which portfolio you will recommend and why.

b) Based on answers in part a interpret the concept of portfolio diversification and its purpose.

Return of Asset 14% 14% 14% Standard deviation 2% 2% 2% B