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A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio. The two securities under consideration both have an expected return equal to 15 percent. However, the distribution of possible returns associated with Asset A has a standard deviation of 12 percent, while Asset B's standard deviation is 8 percent. Both assets are correlated with the market with p = 0.75.

Which asset should the risk-averse investor add to his/her portfolio?

a. Asset A
b. Asset B.
c. Both A and B.
d. Neither A nor B.
e. Cannot tell without more information.

Respuesta :

Answer:

b. Asset B.

Explanation:

Standard deviation is a measure variability or volatility of a stock in which a stock is considered to be more volatile when the return from the stock or its price vary from the average return of the stock or its price.

Therefore, a stock is considered to be highly risky if its standard deviation is high while a stock is considered to have a low risk when its standard deviation is low. Comparing two stocks, a stock with a higher standard deviation is said to be riskier.

From the question, since the 12% standard deviation of Asset A is higher than the 8% standard deviation of Asset B, Asset B is considered to less risky. Therefore, the risk-averse investor should add Asset B to her portfolio.

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