Question

You have a portfolio with a standard deviation of 25 % and an expected return of...

You have a portfolio with a standard deviation of 25 % and an expected return of 15 %. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20 % of your money in the new stock and 80 % of your money in your existing​ portfolio, which one should you​ add?

Expected Return Standard Deviation Correlation w/ Portfolio's returns
Stock A 14% 22% 0.3
Stock B 14% 16% 0.5%

1. Standard deviation of the portfolio with stock A is____
2. Standard deviation of the portfolio with stock B is ____
3. Which stock would you add to your portfolio?

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Answer #1

Solution:

1. The standard deviation of the portfolio with stock A is

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2. The standard deviation of the portfolio with stock B is

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3. Since the standard deviation of stock A is less, therefore you should add stock A with the portfolio.

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