Quiz Ch 08 – Optimal Stock Selection for a Risk-Averse Portfolio

Fundamentals of Financial Management, Concise

Brigham and Houston

09th Edition

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For a risk-averse investor expanding a 3-stock portfolio to 4 stocks, where the initial stocks have b = 1.0 and perfect positive correlation with the market, and potential Stocks A and B both have equilibrium expected returns of 15% and correlation r = 0.75 with the market, but differing standard deviations (12% for A and 8% for B), which stock should the investor choose to add or does the choice not impact the outcome?

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