Perfect positive correlation with the market

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Reference no: EM131307860

You are an extremely risk-averse investor, and are considering adding one more stock to a three-stock portfolio, to form a four-stock portfolio. The current three stocks held in the portfolio all have beta = 1.0 and a perfect positive correlation with the market. The two potential new Stocks, stock A and stock B both have expected returns of 10%, and both are equally correlated with the market, with a correlation coefficient of 0.65. However, Stock A has a standard deviation of returns of 10%, while stock B has a standards deviation of returns of 6% for Stock B. Which stock should you add to your portfolio? (2 points)

a. Either A or B, i.e., it does not better between the two.

b. Stock A.

c. Stock B.

d. Neither A nor B.

e. Add A, since it must have a lower beta

Reference no: EM131307860

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