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You are a portfolio investor and, for simplicity, are investing in only two assets. You must invest in one asset(called Asset A) and then choose one additional asset from a choice of 3 assets. The asset you must invest in has a variance of 0.09. Now, you must choose 1 asset from the following 3.
i) asset B has a variance of 0.04 and a correlation of 0.90 with Asset A.
ii) Asset C has a variance of 0.04 and a correlation of 0.45 with Asset A.
iii) Asset D has a standard deviation of 0.25 and a correlation of 0.35 with Asset A.
Assume equal weights in Asset A and the 2nd asset you choose. You are to choose the asset that provides you the lowest portfolio risk. Which asset do you choose?
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