Stock A has a volatility of 67% and a correlation of 14% with your current portf

Question

Stock A has a volatility of 67% and a correlation of 14% with your current portfolio. Stock B has a volatility of 68% and a correlation of 39% with your current portfolio. You currently hold both stocks. Which of the following choices below will increase the volatility of your portfolio: (i) selling a small amount of stock B and investing the proceeds in stock A, or (ii) selling a small amount of stock A and investing the proceeds in stock B? The marginal contribution to risk for stock A is (Round to one decimal place.) The marginal contribution to risk for stock B is (Round to one decimal place.) Which of the choices below will increase the volatility of your portfolio? (Select the best choice below.) Selling a small amount of stock B and investing the proceeds in stock A. Selling a small amount of stock A and investing the proceeds in stock B.

Explanation / Answer

Marginal contribution to risk = SD(Ri) × Corr(Ri,Rp)
Marginal contribution to risk Stock A = 67% x 14% = 9.38%
Marginal contribution to risk Stock B = 68% x 39% = 26.52%
Option b is correct volatility increases if we sell A and add B.

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