Susan (Sue) Perb has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following forecast information:

RISK AND RETURN CHARACTERISTICS
	Expected Monthly Returns	Standard Deviation of Monthly Returns
Original Portfolio	0.67%	2.37%
ABC Company	1.25%	2.95%
The correlation coefficient of ABC stock returns with the original portfolio returns is 0.40.

a)The inheritance changes Perbs overall portfolio and she is deciding whether to keep the ABC stock. Assuming she keeps the ABC stock, calculate the:

i. Expected return of her new portfolio which includes the ABC stock

ii. Covariance of ABC stock returns with the original portfolio return.

iii. Standard deviation of her new portfolio, which includes the ABC stock.

b) If Perb sells the ABC stock, she will invest the proceeds in risk-free U.S. Treasury securities yielding 0.16% monthly. Assuming Perb sells the ABC stock and replaces it with the Treasury securities, calculate the:

i. Expected return of her new portfolio

ii. Covariance of the Treasury security returns with the original portfolio returns.

iii. Standard deviation of her new portfolio, which includes the Treasury securities.

c) On the basis of conversations with her financial advisor, Perb is considering selling the $100,000 of ABC stock and acquiring $100,000 of XYZ Company common stock instead. XYZ stock has the same expected return and standard deviation as ABC stock. Her financial advisor comments, It doesnt matter whether you keep all of the ABC stock or replace it with $100,000 of XYZ stock. State whether her financial advisors comment is correct or incorrect. Briefly justify your response.

d)Determine whether the systematic risk of her new portfolio, which includes the Treasury securities, will be higher or lower than that of her original portfolio.

e)In another recent discussion with her financial advisor, Perb commented If I just dont lose money in my portfolio, I will be satisfied. She went on to say I am more afraid of losing my money than I am concerned about achieving high returns. Describe one weakness of using standard deviation of returns as a risk measure for Perb.