P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table. Asset Expected return, Standard deviation, gg 8% 5% 13 10 a. If the returns of assets V and W are perfectly positively correlated (correlation coefficient =+1)(correlation coefficient =+1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations. b. If the returns of assets V and W are uncorrelated (correlation coefficient =0)[correlation coefficient =0), describe the approximate range of (1) expected 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)(correlation coefficient =-1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table. Asset Expected return, Standard deviation, gg 8% 5% 13 10 a. If the returns of assets V and W are perfectly positively correlated (correlation coefficient =+1)(correlation coefficient =+1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations. b. If the returns of assets V and W are uncorrelated (correlation coefficient =0)[correlation coefficient =0), describe the approximate range of (1) expected 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)(correlation coefficient =-1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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How do you determine the expected return and risk?
Transcribed Image Text:P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return
behaviors associated with various combinations of assets V and W under three assumed
degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The
expected returns and standard deviations calculated for each of the assets are shown in the
following table.
Asset
Expected return,
Standard deviation, gg
8%
5%
13
10
a. If the returns of assets V and W are perfectly positively correlated
(correlation coefficient =+1)(correlation coefficient =+1), describe the
range of (1) expected return and (2) risk associated with all possible portfolio
combinations.
b. If the returns of assets V and W are uncorrelated
(correlation coefficient =0)[correlation coefficient =0), describe the
approximate range of (1) expected 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)(correlation coefficient =-1), describe the
range of (1) expected return and (2) risk associated with all possible portfolio
combinations.
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