Exercise $4$:

Expected Return

Standard Deviation

Assuming the presence of two stocks, A and $B,$ with their characteristics defined as follows: $E(R_A)=5\%,S_A=20\%,E(R_B)=20\%,$ and $S_B=40\%.$

Additionally, various correlation coefficients are considered, including:

Perfectly and positively correlated assets

Perfectly and negatively correlated assets

Independent assets

Correlation coefficient of $0\mathrm{.}5$

Correlation coefficient of $-0\mathrm{.}5$

For each type of correlation, the assignment involves, explain:

How did we construct the efficient frontier corresponding to each correlation coefficient.

Identify the figure that matches each correlation coefficient.

Explore the concept of diversification and identify the conditions under which it is most effective.