You have just taken over as a fund manager at a brokerage firm. Your assistant,

Question

You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states "We have too much of our portfolio in Alpha. We should probably move some of those funds into Gamma so we can achieve better diversification." Is he right? Here is the data on all three stocks. Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price $30.00; Current Weight 78%; Next Year's Price: Expansion $37.00, Normal $32.00, Recession $24.00; Beta, Current Price 27.50; Current Weight 22%; Next Year's Price: Expansion 27.50, Normal 26, Recession 25; Gamma, Current Price $15.00; Current Weight 0%; Next Year's Price: Expansion $18.50, Normal $16.00, Recession $12.00.

a)Even if the probabilities for different states of economy (expansion, normal and recession) are available one still doesn't have sufficient information to make a definitive statement.

b)Only if the probabilities for different states of economy (expansion, normal and recession) become available would one be able to make a definitive statement.

c)Yes.

d)No.

Explanation / Answer

Answer

b)Only if the probabilities for different states of economy (expansion, normal and recession) become available would one be able to make a definitive statement.

Note : if the probability than we can calculate the expected price and the standard deviation on each stock and than we can analyse whether we can be able to make a definitive statement

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