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‘The zero risk investment will always involve positive investment in both assets if you plan to...

‘The zero risk investment will always involve positive investment in both assets if you plan to invest in two risky assets.’ Do you agree with this statement? Discuss.

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Answer #1

Yes a zero risk investment will involve positive investment in two risk assets. If correlation between assets is -1 then total risk or standard Deviation can be 0. By taking proper weights in risky asset 1 and risky asset we can minimize the risk and standard deviation to 0. Weight of Asset 1/Weight of asset 2 =Standard Deviation of 2/Standard Deviation of 1
Hence there is positive investment in both assets and their ratio is equal to ratio of their standard deviations.

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