Here are the expected returns and risks of two portfolios – a domestic and a foreign:...
Here are the expected returns and risks of two portfolios – a domestic and a foreign:
E(r domestic) = 12% σdomestic = 10%
E(r foreign) = 16% σforeign = 12%
a. Assume a correlation of 0.5 and draw all the portfolios made up of the two assets in
an Expected Return/Risk graph.
b. Repeat the procedure in part (a) assuming a correlation of -1, 0, and +1.
c. Looking at the four graphs, what do you conclude about the importance of correlation
in risk-reduction?
d. Comment on the advantages and disadvantages of international diversification
Please solve in Excel
Homework Answers
a) 
b) Corr = 1
Corr = 0
Corr =-1
c) Negative correlation reduces risk and is used in hedging
d) The foreign investment allows investors to reduce the total risk of the portfolio while offering additional return potential. By expanding the investment opportunity set, international diversification helps to improve the risk-adjusted performance of a portfolio.
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Here are the expected returns and risks of two portfolios – a
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