A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?   Group of answer choices   Stock B. Either A or B, i.e., the investor should be indifferent between the two. Neither A nor B, as neither has a return sufficient to compensate for risk. Stock A. Add A, since its beta must be lower.

Question
A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
 
Group of answer choices
 
Stock B.
Either A or B, i.e., the investor should be indifferent between the two.
Neither A nor B, as neither has a return sufficient to compensate for risk.
Stock A.
Add A, since its beta must be lower.

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Finance

Portfolio Theories

Phases of Portfolio Management

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Bermuda Cruises issues only common stocks and coupon bonds. The firm has a debt-equity ratio of 0.45...

A: Here, The weighted average cost of capital is WACC i.e. 13.5%. The cost of equity is Re i.e. 17.6%. ...

Q: On March 1, Minnerly Motors obtains a business loan from a local bank. Theloan is a $25,000 interest...

A: The formula to compute interest charge as follows:

Q: More on types of bonds You can distinguish the various types of bonds by their terms of contrac...

A: Description Type of Bonds These bonds are collateralized securities with first claims in the e...

Q: a)fast internationalization strategy for Better Generation has some associated risks. What are these...

A: The strategies that are followed by the organization with the purpose of expanding their business ac...

Q: Stock A and Stock B have the following historical returns: Year             Stock A’s Returns,      ...

A: Hi, since there are multiple questions posted, we will answer the first three sub-part questions. If...

Q: A. Nii Laryea purchased a T-bill with a GHC10,000 par value for GHC9,465. One hundred days later, Ni...

A: Click to see the answer

Q: Discus the view that interest rate risk management has been the most crucial in the risk management ...

A: Interest rate risk is the risk of changing market rates which would affect the income and expenses o...

Q: 5. Auto loan requires payments of 300 Rial at the end of each interval for 3 years at a nominal annu...

A: MS-Excel --> Formulas --> Financials --> Nper Therefore, the number of payments are 36 and...

Q: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...

A: Net present value of an investment refers to the total discounted cash inflows minus the discounted ...