If two investments have a correlation of (-1) you can reach a portfolio with a zero risk as measured by standard deviation. Is this true or false? Explain
Answer: The given statement is true.
Explanation:
Portfolio risk of a two asset (investments) portfolio is calculated
as:
[(Wa*sa)^2+(Wb*sb)^2 + 2*Wa*Wb*(-1)*sa*sb]^(1/2)
Here, -1 refers to the correlation between the asset
returns
Wa,Wb refers to the weight of the assets in the portfolio, and sa
and sb refers to the standard deviation of the assets
Simplifying the equation, we get;
=[(Wa*sa-Wb*sb)^2]^(1/2)
=(Wa*sa-Wb*sb)
=0
So, if the above condition is met, we can get a zero risk portfolio.
Get Answers For Free
Most questions answered within 1 hours.