Reference no: EM131624390

Question: Assume you wish to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfect positive, uncorrelated, and perfect negative. The following average return and risk values were calculated for these assets.

Asset          Average                        Risk (Standard Asset
                 Return, r¯                          Deviation), s

V                  8%                                    5%

W                13%                                  10%

a. If the returns of assets V and W are perfectly positively correlated (correlation coefficient = +1), describe the range of (1) return and (2) risk associated with all possible portfolio combinations.

b. If the returns of assets V and W are uncorrelated (correlation coefficient = 0), describe the approximate range of (1) return and (2) risk associated with all possible portfolio combinations.

c. If the returns of assets V and W are perfectly negatively correlated (correlation coefficient = -1), describe the range of (1) return and (2) risk associated with all possible portfolio combinations.