An investor is considering investing one-half of his wealth in Asset A and one-half in Asset B. He is not sure how the two assets are correlated. The correlation might be r = +1 or it might be r = -1
If it is r = + 1, then the portfolio standard deviation is 15%. Calculate the portfolio standard deviation if the correlation is r = -1. What is the difference between the standard deviations of Scenario 1 and Scenario 2? (Scenario 1 - Scenario 2 )
ASSET A ASSET A ASSET B ASSET B Correlation
Scenario Expected Return Standard Deviation Expected Return Standard Deviation Correlation of A and B
1 10% 20% 5% 10% +1
2 10% 20% 5% 10% -1
A) 2.5%
B) 5.0%
C) 7.5%
D) 10.0%
E) 15.0%
D
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