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:

International Subsidiary

An international subsidiary is a company that is wholly or partially owned by another company, called the parent company, and is located in a country different from where the parent company is situated.

Debt Securities

Financial instruments indicating a debt owed by the issuer to the holder, typically in the form of bonds, bills, or notes.

Available-for-sale Securities

Financial assets not classified as held-to-maturity or trading securities, and can be sold in the market.

Significant Influence

The capacity to affect the operating and financial decisions of another entity, typically through ownership of a substantial share of its stock.