1. Short Answer Questions: John is considering investing in the stock market. He has studied FIN3000 at Baruch College, so he has a rough idea that diversification is good. He decides to create a portfolio with 80% of his wealth in Stock A (beta=0.2; std. = 15%) and 20% of his wealth in Stock B (beta=1.5; std. = 12%). The reason why he puts much higher weight in Stock A is because he believes that the low beta value of Stock A can lead him to lower risk. Please comment on his thought. Is there anything wrong with Johns reasoning? How would you suggest him to conduct his financial decision?

(Note: There is a model answer for the part reasoning why John is right or wrong. However, there is no model answer for the suggestion part. In the real final exam, I will grade questions like this based on 2 criterions: first, does your suggestion follow the right concept we learned in the class? And second, how far and decent you can elaborate.)