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Question(s) / Instruction(s):

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, k, 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 r = 0.75. Which asset should the risk-averse investor add to his/her protfolio? 

  1. Asset A.
  2. Asset B. 
  3. Both A and B.
  4. Neither A nor B.
  5. Cannot tell without more information.

 

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