Question

When two assets have +1 correlation...        The investment opportunity set is the line connecting...

When two assets have +1 correlation...
      
The investment opportunity set is the line connecting the two assets.
The assets’ covariance can be positive or negative.
Knowing that one asset’s return is above its expected return tells you nothing about the other asset’s return.
The Minimum Variance Portfolio’s return is the risk free rate.

Homework Answers

Answer #1

If the two assets are positively correlated, then the investment opportunity set is a line joining these two assets as the portfolio risk and return would simply be the linear combinations of these two assets as there is no benefit from diversification and if the return required increases the risk increases in proportion.

So, the correct option is option A .

When assets are positively correlated then the covariance is also positive. The assets which are positively correlated tends to move in the same directions.

The minimum variance portfolio return is not the risk free rate.

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