S-17 What is correlation, and why is it important with respect to asset returns? Describe the characteristics of returns that are (a) positively correlated, (b) negatively correlated, and(c) uncorrelated. Differentiate between perfect positive correlation and perfect negative correlation .

S-18 What is diversification ? How does the diversification of risk affect the risk of the portfolio compared to the risk of the individual assets it contains?

S-19 Discuss how the correlation between asset returns affects the risk and return behavior of the resulting portfolio. Describe the potential range of risk and return when the correlation between two assets is (a) perfectly positive, (b) uncorrelated, and (c) perfectly negative .

S-20 What benefit, if any, does international diversification offer the individual investor? Compare and contrast the methods of achieving international diversification by investing abroad versus investing domestically.