11.8

You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 13% with a volatility of 19%. Currently, the risk-free rate of interest is 3.7%. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an expected return of19%, a volatility of 60%, and a correlation of 0 (zero) with the Natasha Fund.

a. Calculate the required return of Hannah stock. Is your broker right?

The required return of Hannah stock is ______%. (Round to one decimal place.) Yes

b. You follow your broker's advice and make a substantial investment in Hannah stock so that, considering only your risky investments, 65% is in the Natasha Fund and 35% is in Hannah stock. When you tell your finance professor about your investment, he says that you made a mistake and should reduce your investment in Hannah. Recalculate the required return on Hannah stock. Is your finance professor right?

The required return of Hannah stock is _______%. (Round to one decimal place.) Yes

c. You decide to follow your finance professor's advice and reduce your exposure to Hannah. Now Hannah represents 14.161% of your risky portfolio, with the rest in the Natasha fund. Recalculate the required return on Hannah stock. Is this the correct amount of Hannah stock to hold?

Hint: Make sure to round all intermediate calculations to at least five decimal places.

The required return of Hannah stock is ______%. (Round to one decimal place.) No