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You are an extremely risk-averse investor, and are considering adding one more stock to a three-stock portfolio, to form a four-stock portfolio. The current three
You are an extremely risk-averse investor, and are considering adding one more stock to a three-stock portfolio, to form a four-stock portfolio. The current three stocks held in the portfolio all have beta = 1.0 and a perfect positive correlation with the market The two potential new Stocks, stock A and stock B both have expected returns of 10%, and both are equally correlated with the market, with a correlation coefficient of 0.65. However, Stock A has a standard deviation of returns of 10%, while stock B has a standards deviation of returns of 6% for Stock B. Which stock should you add to your portfolio? Either A or B, i.e., it does not better between the two. Stock A. Stock B. Neither A nor B. Add A, since it must have a lower beta. You have the following data on four stocks: To minimize your risk, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio. A; B. A; C. B; C. A; D. B; D
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