Portfolio of Two Risky Securities
? ?12 is the correlation coefficient
? Special correlation cases:
? Perfectly (positively) correlated (?12?1)
?p?w?1?(1?w)?2
? Perfectly negatively correlated (?12??1)
?p?w?1?(1?w)?2
? In general: ?1??12?1
?p?w?1??1?w??2
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Example of Portfolio with Two Risky Assets
? Security 1: r1?14% and ?1?20%
? Security 2: r2?8% and ?2?15%
? ?12?0
? w?0.25
rP?0.25?14%?0.75?8%?9.5%
22222 ?P?0.25?0.2?0?0.75?0.15?0.01515625
?P?12.31%
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The Portfolio Risk?Return Trade?off
Portfolio R B V C D S
Proportion Proportion Expected in Asset 1 in Asset 2 Return %
0 100% 8.00 25% 75% 9.50 36% 64% 10.16 50% 50% 11.00 75% 25% 12.50 100% 0% 14.00
Standard
Deviation % 15.00 12.31 12.00 12.50 15.46 20.00
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The Portfolio Expected Return0.160.14Expected Return0.120.100.080.060.040.020.0000.20.40.60.81Portfolio Weights
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