D K You have a portfolio with a standard deviation of 30% and an expected rotum of 18% You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? 6 Expected Standard Correlation with Return Deviation Your Portfolio's Returns 15% 0.25 0.2 15% 0.2 0.6 w E(R) 20% w 18% Existing Portfolio Stock A Correlation Adjustment SD 80% 15% 2 30% 25% 0.20 Variance SD w E(R) 10 Stock A 11 Stock B 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 24 w 20% 18% Existing Portfolio Stock B Correlation Adjustment SD 80% 15% 2 30% 20% 0.60 Variance SD Both portfolios have the same expected return But the portfolio with Stock A has a lower volatility I would choose the portfolio with Stock A lower risk for the same return