The Allied Group has acquired Kramer Industries and is now considering additional investments. They have determined that there is a firm that is a good fit for their portfolio, the Kramer firm of Montana. The firm was established in 1990 and has the following historical returns:

Kramer Industries

Year

Earnings

1990

(8% Loss)

1995

23%

2000

26%

2005

31%

2010

18%

Address all of the following questions:

• What was the average return for the stock over the period of 1990 through 2010?
• What was the standard deviation for the stock over this period?
• Assume that you currently have a portfolio that returns 19.5%. If you add this stock to the current portfolio, what would happen to the average return on the portfolio?
• Should Allied invest in the stock? Justify your response.