Correlation, risk, and return Nikki Williams wishes to evaluate the risk and return behaviors associated with various
Question:
Correlation, risk, and return Nikki Williams wishes to evaluate the risk and return behaviors associated with various combinations of assets X and Y under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative.
The expected returns and standard deviations calculated for each of the assets are shown in the following table.
a. If the returns of assets X and Y are perfectly positively correlated (correlation coefficient = +1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
b. If the returns of assets X and Y are uncorrelated (correlation coefficient = 0), describe the approximate range of (1) expected return and (2) risk associated with all possible portfolio combinations.
c. If the returns of assets X and Y are perfectly negatively correlated (correlation coefficient = -1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
Step by Step Answer:
Principles Of Managerial Finance
ISBN: 9781292400648
16th Global Edition
Authors: Chad Zutter, Scott Smart