Reference no: EM132460447

1. An investor owns a $900,000 fully diversified portfolio. She subsequently inherits shares of ABC Company stock worth $100,000. As her financial advisor, you have computed the following estimates:

a) Assume that the investor keeps the ABC stock. Calculate the expected monthly return and standard deviation of her new portfolio.

b) Assume that the investor sells the ABC stock and invests the proceeds in the risk- free government bonds yielding 0.2% per month. Calculate the expected monthly return and standard deviation of her new portfolio.

c) The investor considers selling the ABC Company stock and buying instead XYZ Company stock, which has the same expected return and standard deviation as ABC stock. The investor's husband argues that it does not matter whether your keep ABC stock or replace it with XYZ stock. Is her husband correct? Explain.

d) The investor tells you that she is more afraid of losing money than achieving high returns. Explain briefly why using volatility as a measure of risk may not be appropriate for the investor. 

Expected Monthly Return Volatility of Monthly Returns

Original Portfolio .50% 2.35%

ABC Company 1.25% 3.12%

Correlation = .45