Question 2: (a) What is meant by the term correlation? What is meant by the term diversification? (b) Suppose that you are considering adding Real Estate investments to a portfolio of US equities. The...

Q2. part b) all parts.

Extracted text: Question 2: (a) What is meant by the term correlation? What is meant by the term diversification? (b) Suppose that you are considering adding Real Estate investments to a portfolio of US equities. The following data is available to you: US Equities Real Estate Average annual return (% p.a) Standard deviation (% p.a.) 9.26% 8.44% 17.38% 8.67% You are also told that the correlation of returns to US Equities and Real Estate is 0.23. (b) (i) Suppose you form a portfolio with a weight of 80% on US Equities and 20% on Real Estate. Using your knowledge from Business Finance, compute the expected return and standard deviation to this portfolio. (b) (ii) Repeat the calculation in (b)(i) above but this time assume the correlation between US Equities and Real Estate is 0.93. (b) (iii) Comment on your results.