have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
A)A; A.
B)A; B.
C)B; A.
D)C; A.
E)C; B.

Question

Quizplus · Accepted Answer

To minimize risk while holding a stock in isolation, we need to choose the stock with the lowest standard deviation (as all three stocks have the same expected return). Looking at the data, we see that Stock B has the lowest standard deviation of 10%. Therefore, the answer cannot be A or C.

To minimize risk in a well-diversified portfolio, we need to choose the stock that has the lowest correlation with the other stocks in the portfolio. Looking at the correlation coefficient matrix, we see that Stock A has the lowest correlation with the other stocks. Therefore, the answer cannot be B or E.

Putting these two together, we get that the answer is C, as Stock B should be chosen if held in isolation, and Stock A should be chosen if held as part of a well-diversified portfolio.

Have the Following Data on Three Stocks: If You Are