You are an investment manager for Simple Asset Management, a
company that specializes in developing simple investment portfolios
consisting of no more than three assets such as stocks, bonds,
etc., for investors who like to keep things simple. One of your
more popular investments is called the All World Fund and is
composed of global stocks with good dividend yields. A client is
interested in constructing a portfolio that consists of the All
World Fund and the Treasury Index Fund, which consists of U.S.
Treasury securities (government bonds).
You calculate a 7.8% expected return on the All World Fund with
a return standard deviation (a measure of risk) of 18.90%. The
expected return of the Treasury Index Fund is 5.50% with a return
standard deviation of 4.6%. To analyze the relationship between the
two investments, you also calculate the covariance between the two
Which graph below best represents the expected returns for the
following investment allocations?