FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 95

Which of the following statements is
CORRECT?
Question 4
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?
Correct Answer: