Question: 1. Why does the portfolio risk go down when you include more financial assets in a portfolio? How does it happen? 2. Assume that you

1. Why does the portfolio risk go down when you include more financial assets in a portfolio? How does it happen?

2. Assume that you have invested in two stock A and B. Stock A has a standard deviation of return of 10 percent. Stock B has a standard deviation of return of 20 percent. The correlation coefficient between the two stocks is 0.60. If you invest 60 percent of your funds in stock A and 40 percent in stock B, what is the standard deviation of your portfolio?

3. Write down the CAPM equation. Define every part of it. How does it help us in financial decision making?

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