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Business, 12.12.2019 20:31 memorybuxton

Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. she is highly risk averse and has asked for your advice. 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? a. stock a. b. stock b. c. neither a nor b, as neither has a return sufficient to compensate for risk. d. add a, since its beta must be lower. e. either a or b, i. e., the investor should be indifferent between the two.

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