Asset 1 has 6% expected return and 5% standard deviation.Asset 2 has 12% expected return and...
Asset 1 has 6% expected return and 5% standard deviation.Asset 2 has 12% expected return and 10% standard deviation
A. If the correlation coefficient is less than one, then no portfolio obtained by combining assets 1 and 2 can have an expected return larger than 6%.
B. If the correlation coefficient is equal to one, then no portfolio obtained by combining assets 1 and 2 can have a standard deviation lower than 5%.
C. If the correlation coefficient is less than one, then no portfolio obtained by combining assets 1 and 2 can have an expected return smaller than 12%
D. If the correlation coefficient is less than one, then no portfolio obtained by combining assets 1 and 2 can have a standard deviation lower than 5%
Homework Answers
Correct answer is option (B) If the correlation coefficient is equal to one then no portfolio can be obtained by combining assets 1 and 2 can have a standard deviation lower than 5%
Explanation:-
When correlation coefficient is one then standard deviation of portfolio is weighted average of standard deviation of individual stocks in a portfolio.Here we have lower SD of asset 1 which is 5% .Now if we take Asset 1 proportion 100 % in the portfolio then SD of portfolio will be 5% and if we decrease the proportion of asset 1 in portfolio then weighted average will always be higher than 5 % .Therefore lower SD than 5% is not possible.
Now option A and C can never be the answer because expected return of portfolio is not affected by correlation coefficient
And finally option (D) also cannot be the answer because for example if we take correlation coefficient be 0.1 and weight of asset 1 be 0.9 and weight of asset 2 be 0.1 then S D of portfolio will be lower than 5%
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