You have a portfolio with a standard deviation of 21% and an expected return of

Question

You have a portfolio with a standard deviation of 21% and an expected return of 19%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 30% of your money in the new stock and 70% of your money in your existing portfolio, which one should you add? Standard deviation of the portfolio with stock A Is %. (Round to tow decimal places.) Standard deviation of the portfolio with stock B Is %. (Round to tow decimal places.) Which stock should you add and why? (Select the best choice below.) Add A because the portfolio is less risky when A is added. Add B because the portfolio is less risky when B is added. Add either one because both portfolios are equally risky.

Explanation / Answer

Standard Deviation of Portfolio with Stock A = ((0.24)2 (0.30)2 + (0.21)2 (0.70)2 + 2 (0.24) (0.30) (0.21) (0.70))1/2

                                                                                     = 0.219 or 21.90%

Standard Deviation of Portfolio with Stock B = ((0.20)2 (0.30)2 + (0.21)2 (0.70)2 + 2 (0.20) (0.30) (0.21) (0.70))1/2

                                                                                     = 0.207 or 20.70%

The Stock B Should be added

Because the portfolio is less risky when B is added

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