You have the following data on three stocks: If you are a strict risk minimizer,you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

A) A;A.
B) A;B.
C) B;A.
D) C;A.
E) C;B.

Question

You have the following data on three stocks: If you are a strict risk minimizer,you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

A) A;A. 
B) A;B. 
C) B;A. 
D) C;A. 
E) C;B.

Quizplus · Accepted Answer

In order to minimize risk when holding a stock in isolation, we want to choose the stock with the lowest standard deviation, which is Stock C with a standard deviation of 5%. 
When holding a well-diversified portfolio, we want to choose a stock with a low correlation to the other assets in the portfolio. Looking at the correlation matrix, we see that Stock C has the lowest correlation with the other two stocks (0.2 and -0.1). Therefore, Stock C would be the best choice to hold in a well-diversified portfolio.

You Have the Following Data on Three Stocks: If You