Question

Question 14 5 pts An investor currently holds stock in Athena Corporation and is considering buying stock in either CanoeBrook Corporation or Five J's Corporation. All three stocks have the same expected return and risk. The correlation between Athena & CanoeBrook is 0.35. The correlation between Athena and Five J's is 0.05. Portfolio risk is expected to: Decline more when the investor buys CanoeBrook Can't tell - need the correlation between CanoeBrook and Five's Remain the same regardless of weather the investor buys CanoeBrook or Five J's since they both have the same risk and return Can't be determined, need to know the proportions of each stock and their respective returns & risks Decline more when the investor buys Five J's Next

Answer 1

Question 14 :

The stock which is going to be added to the portfolio, should have a negative or a lower correlation with the existing stocks of the portfolio. The greater will be the risk reduction, if the correlation is lower or negative. As five j's has a lower correlation of 0.05 , the greater risk reduction benefits will be achieved by adding this stock.

So, the correct option is option 5.