You have just taken over as a fund manager at a brokerage firm. Your assistant,

Question

You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states "We have too much of our portfolio in Alpha. We should probably move some of those funds into Gamma so we can achieve better diversification." Is he right? Here is the data on all three stocks. Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price $40.00; Current Weight 87%; Next Year's Price: Expansion $49.50, Normal $43.00, Recession $33.50; Beta, Current Price 27.50; Current Weight 13%; Next Year's Price: Expansion 27.50, Normal 26, Recession 25; Gamma, Current Price $24.00; Current Weight 0%; Next Year's Price: Expansion $29.70, Normal $25.80, Recession $20.10.

Which of the following is correct answer:

a)Yes.

b)No.

c)Even if the probabilities for different states of economy (expansion, normal and recession) are available one still doesn't have sufficient information to make a definitive statement.

d)Only if the probabilities for different states of economy (expansion, normal and recession) become available would one be able to make a definitive statement.

Explanation / Answer

Even if the probabilities for different states of economy (expansion, normal and recession) are available one still doesn't have sufficient information to make a definitive statement.

Because with the probabilities the expected value or outcome can be calculated but not the accurate one.

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