Suppose you have 100,000 of savings to invest. Since you learnt in your Masters studies that you should not put all the eggs in one basket, you are considering different stocks to diversify. Suppose 60% of your portfolio comprises Amazon stocks and the remainder in Boeing. Amazon currently earns a return of 3.1% with a standard deviation of 15.8%. Boeing earns 9.5% return and has a standard deviation of 23.7%. The expected return of the portfolio is 5.66%.

a) You are considering to add a third stock to your portfolio with the following are Betas. What do they Betas mean and how are they calculated?

Stock = Beta

Amazon = 2.16

Disney = 0.96

Ford = 1.75

Newmont = 0.63

Dell = 1.41

Exxon Mobil = 0.55

Starbucks = 1.16

Johnson & Johnson = 0.50

Boeing = 1.14

Campbell Soup = 0.30

b) Which stock will lower the risk of portfolio returns the most? Calculate the portfolio Beta if the allocation changes to 40% in Amazon, 40% in Boeing and 20% in the third one?