Your Friend Is Considering Adding One Additional Stock to a 3-Stock

question 141

Multiple Choice

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.

Explain the significance of infrastructure development, such as railroads, on national economics.

Understand the role of key figures and innovations in the development of various industries.

Recognize the regional economic disparities and their historical causes and implications.

Understand the principles and methods of asset depreciation, including different methods of calculating depreciation.

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Definitions:

Depression of the 1930s

A severe worldwide economic downturn that lasted throughout the 1930s, marked by significant declines in industrial production, widespread unemployment, and deflation.

Recession

A temporary stage of economic depletion, highlighted by a downturn in trade and industrial action, normally identified by a GDP reduction in two back-to-back quarters.

Stagflation

A situation in the economy where inflation and unemployment rates are high simultaneously, leading to slow economic growth.

Deflation

A decrease in the general price level of goods and services, often indicative of a reduction in the money supply or demand.