Suppose that Mike has been holding asset B. (That is, Mike is holding a portfolio that entirely consists of asset B). Today, a stock broker came to Mike and recommended that he add a little bit of asset A into his portfolio (for example, 80% of asset B and 20% of asset A). Mike rejected this suggestion because he thinks that it is not a good idea to add a riskier asset into his portfolio - - based on the answers for Q3 and Q4, he knows that asset A is riskier (than asset B) in the sense that it has a higher standard deviation. Do you think that rejecting the stock broker's suggestion was a correct decision?

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Business

Luca Stewart

17 January, 21:52

Suppose that Mike has been holding asset B. (That is, Mike is holding a portfolio that entirely consists of asset B). Today, a stock broker came to Mike and recommended that he add a little bit of asset A into his portfolio (for example, 80% of asset B and 20% of asset A). Mike rejected this suggestion because he thinks that it is not a good idea to add a riskier asset into his portfolio - - based on the answers for Q3 and Q4, he knows that asset A is riskier (than asset B) in the sense that it has a higher standard deviation. Do you think that rejecting the stock broker's suggestion was a correct decision?

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Titus Gonzales · Answer 1

Suppose that Mike has been holding asset B. (That is, Mike is holding a portfolio that entirely consists of asset B). Today, a stock broker came to Mike and recommended that he add a little bit of asset A into his portfolio (for example, 80% of asset B and 20% of asset A). Mike rejected this suggestion because he thinks that it is not a good idea to add a riskier asset into his portfolio - - based on the answers for Q3 and Q4, he knows that asset A is riskier (than asset B) in the sense that it has a higher standard deviation. Do you think that rejecting the stock broker's suggestion was a correct decision - No

Explanation:

The returns that the portfolio can generate needs to be analyzed by Mike, and this can be achieved by adding the riskier asset.

If adding a little bit of the riskier project would lead to an increase in the returns by a greater proportion, then it may be beneficial to do the same. Therefore. Mike should consider the option before rejecting it completely.