Here Are the Expected Returns and Risks of Two Assets $\sigma$

question 13

Essay

Here are the expected returns and risks of two assets:
E(R₁) = 10% $\sigma$ ₁ == 16%
E(R₂)= 14% $\sigma$ ₂ = 16%
a. Assume a correlation of 0.5 and draw all the portfolios made up of the two assets in an Expected Return/Risk graph.
b. Same question assuming successively a correlation of -1, 0, and +1.
c. Looking at the four graphs, what do you conclude about the importance of correlation in
risk-reduction?

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