High risk but huge potential returns

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Jack recommends a Brazilian bank in the portfolio, saying it is high risk but huge potential returns. Diane finds a small risk US bank that she wants to add to the portfolio instead of the Brazilian bank. The Brazilian bank and US bank have the same standard deviation or volatility but Jack calculates that the Brazilian bank stock has a lower correlation coefficient with the other stocks already in the portfolio than the US bank proposed by Diane. Which stock if added will increase the risk of the portfolio overall more and why? Explain why adding a super risky Brazilian bank may make sense in the context of a portfolio, even a conservatively managed one.

Reference no: EM131974633

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