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Stock selection for risk-averse investor

A highly risk-averse investor is considering adding one additional stock to a 4-stock portfolio. Two stocks are under consideration. Both have an expected return of 15%. However, the distribution of possible returns associated with Stock A has a standard deviation of 12%, while Stock B's standard deviation is 8%. Both stocks are equally highly correlated with the market, with r equal to 0.75 for both stocks. Which stock should the risk-averse investor add to his/her portfolio?

Solution Summary

The solution explains how to determine the best stock for a risk-averse investor.