question archive A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio
A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio
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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 a perfect positive correlation with the market. Potential new Stocks A and B both have expected returns of 15%, and both 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 matter?
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Answer:
choice is B) Stock B.
This is because the two stocks are equally correlated with the market, both have the same expected returns, the only difference is that Stock A has a higher standard deviation. And since the investor is risk averse, then he would prefer a stock that does not have a high standard deviation
