Math  /  Word Problems

QuestionEvaluate the risk and return for assets V (8%, 5%) and W (13%, 10%) under three correlation scenarios: +1, 0, -1.

Studdy Solution
Now, let's consider the three scenarios.
a. If the returns of assets V and W are perfectly positively correlated (correlation coefficient = +1), the risk of the portfolio will be the highest. The range of expected return will be between the expected return of the least profitable asset (V) and the most profitable asset (W), i.e., between8% and13%. The risk will be a weighted sum of the risks of the individual assets.
b. If the returns of assets V and W are uncorrelated (correlation coefficient =0), the risk of the portfolio will be less than in the case of perfect positive correlation. The range of expected return will still be between8% and13%. The risk will depend on the weights of the assets in the portfolio.
c. If the returns of assets V and W are perfectly negatively correlated (correlation coefficient = -1), the risk of the portfolio can be reduced to zero by choosing appropriate weights for the assets. The range of expected return will still be between8% and13%.

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