|Security A||Security B| Expected return = WArA + WBrB where "W"
is the percentage of all money invested in a security (expressed
as a decimal) and "r" is the security's expected return.
|Portfolio||Percentage of money invested in security A
WA||Percentage of money invested in security B WB||Portfolio's
expected return||Portfolio's standard deviation (correlation
coefficient is +1.0)||Portfolio's standard deviation
(correlation coefficient is 0.0)||Portfolio's standard deviation
(correlation coefficient is -1.0)| |1||1.0 (100%)||0
(0%)||5%||4%||4%||4%| The relationship between expected return
and standard deviation is graphed below for the seven portfolios
assuming three different degrees of correlation between
securities A and B. Point A represents portfolio #1, and Point B
represents portfolio #7. As you go from portfolio #1 to
portfolio #7, you take a path from point A to point B. The three
paths reflect the three different correlation coefficients
assumed in the example. When a financial security is added