Correlation and Asset Returns

In the realm of financial analysis, understanding the relationship between two investment returns is crucial. Correlation is a statistical measure that describes the degree to which two variables move in relation to each other. It is quantified by a correlation coefficient which ranges from -1 to +1, where -1 indicates a perfect negative correlation, +1 indicates a perfect positive correlation, and 0 indicates no correlation at all.

Consider two assets, A and B, with the following characteristics:

• The average return of asset A is 12%.
• The average return of asset B is 8%.
• The correlation coefficient between the returns of assets A and B is 0.5.

If the return of asset A increases, what can be reasonably expected to happen to the return of asset B?