INVESTMENTS Correlation coefficients Possible val Range of values for +1.0≥p,>-10 Ifp. =1.0, the securities would be perfectly positively correlated 1. 0. the securities would be perfectly negatively correlated
INVESTMENTS Range of values for ρ1,2 + 1.0 > ρ > -1.0 If ρ = 1.0, the securities would be perfectly positively correlated If ρ = - 1.0, the securities would be perfectly negatively correlated Correlation Coefficients: Correlation Coefficients: Possible Values Possible Values
INVESTMENTS Three- sSecurity portfolio rp=W+W22+ W33 0.2 W +Wo2 +w 303 +2W1W2 Cov(r r2) +2W,W3 Cov( r3) +2W,W3 Cov(r2r3)
INVESTMENTS σ 2 p = W1 σ 1 2 + 2W 1 W 2 r p = W 1 r1 + W 2 r2 + W 3 r 3 Cov(r 1 r 2 ) + W 3 2 σ 3 2 Cov(r 1 r 3 + 2W ) 1 W 3 Cov(r 2 r 3 + 2W ) 2 W 3 Three -Security Portfolio Security Portfolio 2 + W2 σ 2
INVESTMENTS In general for an orokolo rp=Weighted average of the n securities o=( Consider all pairwise covariance measures
INVESTMENTS r p = Weighted average of the n securities σ p 2 = (Consider all pairwise covariance measures) In General, For an In General, For an n -Security Portfolio: Security Portfolio: