Mr. Smith, CFA, is an investor. He has a $1,700,000 fully diversified portfolio. He is considering to add his investments as much as $300,000 in Stock A. The correlation coefficient between Stock A and his fully diversified portfolio is 0.30. The expected monthly returns are 0.50% (his fully diversified portfolio) and 0.90% (Stock A). The standard deviations of monthly returns are 1.90% (his fully diversified portfolio) and 2.15% (Stock A). 

 

a. Calculate the expected return and standard deviation if Mr. Smith decides to add the Stock A to his portfolio! 

b. Shall Mr. Smith add Stock A into his portfolio? Explain (with calculations)

c. A successful firm like Micrososft has consistently generated large profits for years. Is this a violation of the EMH?

Answer rating: 100% (QA)

a To calculate the expected return and standard deviation of the portfolio after adding Stock A we need to use the following formulas Expected Return of Portfolio Weight of Stock A Expected Return of ... View the full answer