K-free bond or portfolio of stocks

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Reference no: EM131886468

Jim plans to invest $100,000 in either a risk-free bond or a portfolio of 100 stocks. If he buys the bond, it will be worth $107,000 at the end of one year, for a guaranteed return of 7 percent. Alternatively, he could put $1,000 each into 100 different stocks. Each stock has a 50-50 chance of being worth either $2,300 or $0 at the end of the year, so the expected return on each stock (and the whole portfolio) is 15 percent. Which of the following should make Jim more likely to invest in the stock portfolio?

a. The stocks are uncorrelated with each other (r = 0). b. The stocks are highly correlated with each other. c. Neither a nor b is correct; the correlation between stocks makes no difference.

Reference no: EM131886468

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