Given 3 assets all with the same likelihood of occurrence:

Asset Outcome 1 Outcome 2 Outcome 3 Expected Return

1 12 0 6 6

2 12 6 0 6

3 0 6 12 6

If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction?

A) Asset 1 and Asset 2. B) Asset 1 and Asset 3. C) Asset 2 and Asset 3. Answer: A is correct. An equally weighted portfolio of Asset 1 and Asset 2 has the highest level of volatility of the three pairs. All three pairs have the same expected return; however, the portfolio of Asset 1 and Asset 2 provides the least amount of risk reduction. Could someone please explain **how** a portfolio with Asset 1 and Asset two would have the least amount of risk reduction? Thank you!