Response to the following problem:
Assume you wish to evaluate the risk and return behaviours 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 Return, r¯ (%) Risk (Standard 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.