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(b) Mary is considering investing in srocks. Her financial adviser has recommended to her two stocks A and B along with the following information: Return
(b) Mary is considering investing in srocks. Her financial adviser has recommended to her two stocks A and B along with the following information:
| Return forecasted by analyst | Standard deviation of return | Beta | |
| Stock A | 14% | 30% | 2.0 |
| Stock B | 9% | 40% | 0.5 |
| Market index | 11% | 20% | 1.0 |
| Risk-free rate | 3% | 0 | o |
Suppose that Mary wishes to invest in one stock only.
(i) Which stock should Mary choose if she is already holding a well-diversified portfolio? Explain why?
(ii)Which stock should Mary choose if she does not hold any other risky asset? Explain why?
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