Select the best response from below. Assume that an investor currently holding s

Question

Select the best response from below. Assume that an investor currently holding stock in Miller Corporation wants to add the stock of either Bud Corporation or Coors Corporation to her portfolio. All three stocks have the same expected return and volatility. The correlation between Miller and Bud is -0.06; and between Miller and Coors is +0.06. Portfolio risk is expected to:

a) Decline more when the investor buys Bud

b) Decline more when the investor buys Coors

c) Increase when either Bud or Coors is bought

d) May decline or increase depending on other factors

Explain your answer

Explanation / Answer

when the correlation is + it means the both stocks provide same kind of returns.

so, in this example it is better to go with BUd, because he can minimize the total risk with buying this stock. becasue when Miller stock declines, Bud stock goes up and vice versa. so, the portfolio carries lesser risk than earlier stage.

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