The correlations between several pairs of stocks are as follows: Corr(A,B) = 0.85 Corr(A,C) = 0.60 Corr(A,D) = 0.45

Each stock has an expected return of 8% and a standard deviation of 22%.

a. If your entire portfolio is now composed of stock A and you can add some of only one stock to your portfolio, which stock would you choose? (Explain your choice.)

b. Would the answer to a) change for more risk-averse or risk-tolerant investors? Explain.

c. Suppose that in addition to investing in one more stock you can invest in T-Bills as well. Would you change you answers to a) and b) if the T-bill rate is 8%?