This The expeded return and risk wvalues calculated for each of the assets are s

Question

This The expeded return and risk wvalues calculated for each of the assets are shown in the tolowing table, a I the etums of assets V and W are perlectly postively comelated(coreliation coeicent+1), al possde pot combinations w Data Table OA. árange of expected rehm ttiveen 5% and 11% and tisk between ?% and 12% ream beheer, ?% and 12% and mk between ,,% and less than 5% bu? greater than 0% on arange of expected ruin toiveen i% and 12%and mk t-ween 5% ind 11% E xpectedRisk (standard A. àrange a/expected renan beheen 6% and 12% and nsk between 11%and 0% ?3. àtange of expected roam ten-een 8% and t2% and nak between 5% and 11% C. arange of e-peded rehm beitenb% and 12% and nsk between 11%and less ran 5% but geater man 0% D. arange of expected retm behnen 5% and 11% and nsk between % and 12% t the retuns of assets V and W are perlectly ngatively comelated (comeation coecent-1all possible portfollo combinations A. atange of gipeded reun beheer, 5% and 11% and nsk beteen 8% and 12% retm between 8% and 12% and nsk between 11%and less than 5% but greater tan 0% 8%and t2% and nsk behieen 11%and 0%

Explanation / Answer

Let w be the weight of V and 1-w be the weight of W

Range of returns would not depend on the correlation only range of risk would depend on correlation

returns will be =w*8%+(1-w)*12%=12%-w*4%

Maximum value of returns occurs at w=0 and minimum when w=1

At w=0: returns=12% -0*4%=12%

At w=1: returns=12%-1*4%=8%

Hence, range of returns is 8% to 12%

correlation 1:

risk=w*5%+(1-w)*11%=11%-w*6%

Maximum value of risk occurs at w=0 and minimum when w=1

At w=0: risk=11% -0*6%=11%

At w=1: risk=11%-1*6%=5%

Option D

correlation 0:

risk=sqrt(w^2*0.0025+(1-w)^2*0.0121)

Maximum value of risk occurs at w=0 and minimum when w=1

At w=0: risk=11%

At w=1: risk=5%

Option D

correlation -1:

risk=w*5%-(1-w)*11%=16%*w-11%

Maximum value of risk occurs at w=0 and minimum when w=1

At w=0: risk=16%*1-11%=5%

At w=1: risk=16%*0-11%=-11%

Option D

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