Risk & return: Markowitz portfolio theory Standard deviation of a two-asset portfolio: = (X + X62...

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Risk & return: Markowitz portfolio theory Standard deviation of a two-asset portfolio: = (X + X62 + 2X1X2P1.20102)1/2 Where: 1 X & X = proportion invested in stock 1 and 2, respectively , 2 = variance of return on stock 1 and 2, respectively P1,2 = correlation of returns between stocks 1 & 2 DO Exercise Given a portfolio with only 2 assets, assets 1 & 2, with a 50/50 weighting in the portfolio, and with the following expected return and standard deviation : 01 E(R) = 20%, = 10% E(R2) = 20%, 2 = 10% 02 Calculate the covariances and the standard deviation of the portfolio under the following different correlation relationships: 1. r = 1 3. r = -1 2. r = 0 How does the correlation affect the standard deviation of the portfolio? Risk & return: Markowitz portfolio theory Standard deviation of a two-asset portfolio: = (X + X62 + 2X1X2P1.20102)1/2 Where: 1 X & X = proportion invested in stock 1 and 2, respectively , 2 = variance of return on stock 1 and 2, respectively P1,2 = correlation of returns between stocks 1 & 2 DO Exercise Given a portfolio with only 2 assets, assets 1 & 2, with a 50/50 weighting in the portfolio, and with the following expected return and standard deviation : 01 E(R) = 20%, = 10% E(R2) = 20%, 2 = 10% 02 Calculate the covariances and the standard deviation of the portfolio under the following different correlation relationships: 1. r = 1 3. r = -1 2. r = 0 How does the correlation affect the standard deviation of the portfolio?