Question: There are two assets, L and M. Their expected returns are 12% and 8% respectively. The risk of asset L is 5% and the risk

There are two assets, L and M. Their expected returns are 12% and 8% respectively. The risk of asset L is 5% and the risk of asset M is 10%. At the present time, Francis is concerned about reducing his risk. What will be the expected return and risk of a portfolio LM if the assets are held in the following proportions?

_Portfolio Asset proportion in portfolio__________

L L 50% M 50% Correlation coefficient of 0.50

M L 50% M 50% Correlation coefficient of -0.50

Explain to Francis the concept of diversification and how it might apply in his situation.

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