Assume Stock A, Stock B and Stock C Are All

question 32

Essay

Assume stock A, stock B and stock C are all positively correlated. A fourth stock is being considered for addition to the portfolio, either stock D or stock E. Both D and E have expected returns of 12%. If stock D is positively correlated with stock A, B, and C, and E is negatively correlated with A, B, and C, which stock should be added to the portfolio? Why?

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Definitions:

Pay Grade

A step or level within a pay structure that determines the amount of compensation an employee receives.

Formal Operational

The final stage in Piaget’s theory of cognitive development, characterized by the ability to think abstractly, reason logically, and use deductive reasoning.

Abstract Thinking

The capability to understand concepts that are real, such as freedom or love, which are not directly tied to concrete physical reality.

Logical Thinking

The process of reasoning that involves clear, consistent, and systematic steps to arrive at a conclusion.