Homework Answers
Answer:
A)
Portfolio Variance = (w(1)^2 x SD(1)^2) + (w(2)^2 x SD(2)^2) + (2 x
(w(1)*SD(1)*w(2)*SD(2)*q(1,2))
w(1) = the portfolio weight of the first asset
w(2) = the portfolio weight of the second asset
SD(1) = the standard deviation of the first asset
SD(2) = the standard deviation of the second asset
q(1,2)=the correlation between two assets class
So from above equation it is clear that a decrease in correlation between securities in a portfolio results in a decrease in portfolio variance.
B)
Since the assets with perfect correlation move together. So there is no perfect correlation so as the number of assets increases the portfolio variance decreases.
Add Answer to:
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