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Your client has $105,000 invested in stock A. She would like to build a two-stock portfolio by investing another $105,000 in either stock B or

Your client has $105,000 invested in stock A. She would like to build a two-stock portfolio by investing another $105,000 in either stock B or C. She wants a portfolio with an expected return of at least 15.0% and as low a risk as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be the portfolio expected return and standard deviation?

Expected Return

Standard Deviation

Correlation with A

A

16%

45%

1.00

B

14%

39%

0.17

C

14%

39%

0.34

The expected return of the portfolio with stock B is? %. (Round to one decimal place.)

The expected return of the portfolio with stock C is? %. (Round to one decimal place.)

The standard deviation of the portfolio with stock B is? %. (Round to one decimal place.)

The standard deviation of the portfolio with stock C is? %. (Round to one decimal place.)

You would advise your client to choose stock B or stock C because it will produce the portfolio with the lower standard deviation

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