1. Mr. W grows concerned when you recommend two “risky” investments for his portfolio. “Look at the size of those standard deviations!”, he says. “One of those is risky enough, if I own them both; I’m taking on even more risk.” Explain why this may not be the case. Under what circumstance would he be correct? Be sure to address the issue of covariance/correlation.
2. After you eloquent explanation, Mr. W figured he’d read up on MPT. After learning about the Sharpe CAPM, he tells you he wants a high beta portfolio because that will get him more return. He says that Sharpe’s CAPM implies that more risk=more return. Is he right or wrong? Explain