Question: The expected return on asset A is 10%, with a standard deviation of 25%. The expected return on asset B is 5%, and the standard

The expected return on asset A is 10%, with a standard deviation of 25%.

The expected return on asset B is 5%, and the standard deviation is 30%.

Suppose the risk-free interest rate is zero.

a) given the risk and return data for these two assets, would anyone select to hold asset B? Explain your answer graphically.

b) through the calculation shows that the formation of a portfolio will not bring the diversification benefits.

c) Assume that assets An and B are completely positively correlated. Draw a chart to show why rational investors are willing or unwilling to hold asset B in their portfolios.

d) Assuming that assets An and B are completely negatively correlated, form a dual-asset portfolio with zero risk (that is, zero standard deviation of return) .

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