- In forming a portfolio of two risky assets, what must be true of the correlation coefficient between their
returns if there are to be gains from diversification? Explain.
- When adding a risky asset to a portfolio of many risky assets, which property of the asset has a greater
influence on risk: its standard deviation or its covariance with the other assets? Explain.
- A portfolio’s expected return is 12%, its standard deviation is 20%, and the risk-free rate is 4%. Which
of the following would make for the greatest increase in the portfolio’s Sharpe ratio?
a. An increase of 1% in expected return.
b. A decrease of 1% in the risk-free rate.
c. A decrease of 1% in its standard deviation.
