the correlation coefficients between several pairs of stocks are as follows: corr(a, b) = .85; corr(a, c) = .60; corr(a, d) = .45. each stock has an expected return of 9% and a standard deviation of 19%.
a. if your entire portfolio is now composed of stock a and you can add some of only one stock to your portfolio, which would you choose?
i. B
ii. C
iii. D
iv. need more data
b. would the answer to part a change for more risk averse or risk tolerant investors? Explain.
c. Suppose in addition to investing in one more stock you can invest in T-Bills as well. Would you change your answers to parts a and b if T-Bill rate is 8%?
