Question

You are advising a client on which stocks to include in their portfolio. The client currently has an equally weighted portfolio consisting of stock in Delta airlines, Southwest airlines, Amazon inc, and Apple computers. They are considering buying stock in one of the following firms, American Airlines, Microsoft inc, and Coca-Cola.

If you had to advise the client to pick one and only one of the stocks, which would you advise them to purchase, if you wanted to improve the risk-return characteristics of their portfolio?

Answer 1

It can be seen that the client has already exposure into airlines stocks and technology companies as well as retail stocks so if client will have to add another stock in their portfolio it should not be similar to what he was earlier holding, like airline industries or technology industry because they will not be offering any kind of diversification opportunities in overall portfolio.

So, I will be recommending him to add Coca-Cola because this is from food and beverage industries and this will be providing him with another diversification opportunity to his overall portfolio and it will also offer him to improve risk return characteristic of his portfolio as his overall portfolio unsystematic risk will be minimised.