A Highly Risk-Averse Investor Is Considering Adding One Additional Stock

question 135

Multiple Choice

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?

• A) Either A or B,i.e. ,the investor should be indifferent between the two.
• B) Stock A.
• C) Stock B.
• D) Neither A nor B,as neither has a return sufficient to compensate for risk.
• E) Add A,since its beta must be lower.

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Definitions:

Intimate Violence

Physical, sexual, or psychological harm by a current or former partner or spouse.

Physical Aggression

Actions meant to cause harm or physical injury to another person.

Integrating

The process of combining or coordinating different elements or systems into a coherent whole, often to resolve conflicts or differences.

Compromising

Finding a middle ground between conflicting parties' positions, where each side makes concessions to reach an agreement.