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Two investment portfolios are introduced to an investor. I. A diversified portfolio of U.S. stocks that offers an expected rate of return of 10%, with
Two investment portfolios are introduced to an investor. I. A diversified portfolio of U.S. stocks that offers an expected rate of return of 10%, with a standard deviation of 18%. II. A diversified portfolio of International stocks that offers an expected rate of return of 9%, with a standard deviation of 22%. The risk-free rate is 2%. Four investment advisers made the following suggestions to the investor. Which one sounds more reasonable? Invest in both (I) and (II): By investing in both portfolios, our expected returns would be higher than any of the portfolios considered separately. Invest in both (I) and (II): The U.S. and International stocks are not perfectly correlated. There are potential diversification benefits to having both (I) and (II) in our portfolio. Only invest in (I): The portfolio of U.S. stocks have a higher Sharpe ratio. Only invest in (I): The U.S. economy is much stronger than other countries. Hence, U.S. stocks provide a higher return
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