Is her husbands comment correct or incorrect

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Reference no: EM13279353

Abigail has a $900,000 fully diversified portfolio. She subsequently inherits ABC company common stock worth $100,000. Her financial advisor provided her with the following estimates: original portfolio with E(r) 0.67% and SD 2.37%. ABC company with E(r) 1.25% and SD 2.95%. The correlation coefficient between them is 0.40. 1. The inheritance changes her overall portfolio. If she sells the ABC stock, she will invest the proceeds in risk free government securities yielding 0.42%. Assume she does this, what is the expected return of her new porfolio which includes the government securities. Covariance of the government security returns with the original portfolio returns. Standard deviation of her new portfolio which includes the government securities. Based on the conversations with her husband, she is considering selling the $100,000 of ABC stock and acquiring of XYZ company common stock instead. XYZ stock has the same expected return and SD as the ABC stock. Her husband comments, "it doesn't matter whether you keep all of ABC stock or replace it with $100,000 of XYZ stock". Is her husband's comment correct or incorrect?

Reference no: EM13279353

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