The management of Pitsos Ltd is considering the following two investments. The returns of these new projects depend on the state of the economy and they are shown below.
a) Calculate the expected return and risk associated with each security independently
b) Combine the two investments into a portfolio consisting of 50% of A and 50 % of B and calculate the expected return and risk of the portfolio under conditions of:
Perfect positive correlation
Perfect negative correlation
Zero correlation
c) Comment upon your results and identify and discuss the major determinants of systematic and unsystematic risk. Explain why investors diversify their portfolios and what impact this has on the risk-return relation?