Meredith Whitney a top-notch fund manager manages her aunts money. Her aunt, Abby Joseph Cohen, has a fully diversified portfolio of $9,000,000. She subsequently inherits ZBC Companys common stock worth $1,000,000. Meredith has the following estimates regarding the two investments: u.

Original Portfolio:

E(r)= 8%, standard deviation of annual returns =30%

ZBC Stock Expected annual returns :

E(r)=15%, Standard Deviation of annual returns=35%

a) Calculate the expected return and standard deviation of her new portfolio which includes the ZBC stock.

b) If Abby sells the ABC stock, she will invest the proceeds in risk-free commonwealth government securities yielding .42% annually. Calculate the expected return and standard deviation of her new portfolio which includes the government securities.

c) Determine whether the beta of her new portfolio, which includes the government securities, will be higher or lower than the beta of her original portfolio.

d) Abby is considering selling the ZBC stock and acquiring $1,000,000 of Goldman stock instead. You determine that Goldman stock has the same expected return and standard deviation as ZBC stock. Is it true that it doesnt matter whether Abby keeps all of the ZBC stock or replace it with $1,000,000 of Goldman stock? Justify your response.

e) In a recent discussion with Meredith Whitney, Abby said, As long as I j dont lose money in my portfolio, I will be happy. Further, she stated, I am more afraid of losing money than I am concerned about achieving high returns. Given this attitude of Abby, would using standard deviation of returns as a risk measure be suitable for Abby?

f) Given your calculations and Abbys discussion with Meredith, what would be your advice regarding holding ZBC stock versus replacing it with government securities?