3.1 Consider the portfolio consisting of risky asset X and risky asset Y. The following chart...

Transcribed Image Text:

3.1 Consider the portfolio consisting of risky asset X and risky asset Y. The following chart plots the portfolio possibilities curve when risky assets X and Y are perfectly positively correlated, i.e. Pxy = 1 (curve XNY); and the portfolio possibilities curve when risky assets X and Y are perfectly negatively correlated, i.e. pxy = -1 (curve XMY) in the expected return standard deviation space. Relationship between expected return and standard deviation for various correlation coefficients M X p=-1 --p=1 S.D. (Rp) The standard deviation of the portfolio consisting of risky assets X and Y is: 1 Op = (wo + (1 - wx)²o? + 2wx (1 - Wx)Pxyxoy)ź where wx denotes the fraction of investor's funds invested in asset X. Explain why all portfolios of risky asset X and risky asset Y should lie within the shaded area XNYMX if -1 < Pxy < 1. (20%) 3.1 Consider the portfolio consisting of risky asset X and risky asset Y. The following chart plots the portfolio possibilities curve when risky assets X and Y are perfectly positively correlated, i.e. Pxy = 1 (curve XNY); and the portfolio possibilities curve when risky assets X and Y are perfectly negatively correlated, i.e. pxy = -1 (curve XMY) in the expected return standard deviation space. Relationship between expected return and standard deviation for various correlation coefficients M X p=-1 --p=1 S.D. (Rp) The standard deviation of the portfolio consisting of risky assets X and Y is: 1 Op = (wo + (1 - wx)²o? + 2wx (1 - Wx)Pxyxoy)ź where wx denotes the fraction of investor's funds invested in asset X. Explain why all portfolios of risky asset X and risky asset Y should lie within the shaded area XNYMX if -1 < Pxy < 1. (20%)