1. Which farm has had the highest average return? Which would be the riskiest? What are you basing this on? 2. In an early lecture in this class, we discussed the coefficient of variation (CV in your book, “COV” in other texts). Thinking of the average return in this problem as a “benefit” and the standard deviation as the “cost,” compare the three farms using this as CV. What rank do you find for the farms under this definition? Which rank is consistent with the CV discussion from those early class lectures? a. A > B > C b. C > B > A c. C > A > B d. B > A > C 3. What are the 3 correlations for each farm’s return? (If you did it right, you will find that each correlation is positive.) 4. Is the following statement true or false? “It isn’t unusual for farm returns to be positively correlated especially if farms are in the same or similar growing/climatic regions and/or producing the same or similar crops/livestock.” a. True b. False 5. Using your book and class notes, what is the portfolio return and variance for a portfolio consisting of equal shares of A and B? 6. A & C? B & C? 7. What about for a portfolio consisting of equal shares of A, B and C? 8. Even though you found above that one of these farms has a low average return and a high standard deviation, did it help to include this farm in the 3-farm portfolio? Choose the correct response. a. Yes, including Farm B in the portfolio helped reduce the portfolio variance. That is the beauty of the impact of correlation on the portfolio. As long as the asset is not moving in lock step with another asset in the portfolio (perfect positive correlation), including the asset will always bring down the variance of the portfolio. b. No, including Farm B in the portfolio did not help reduce the portfolio variance. That is the beauty of the impact of correlation on the portfolio. As long as the asset is not moving in lock step with another asset in the portfolio (perfect positive correlation), including the asset will not bring down the variance of the portfolio.

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