Parmacheenee Belle's entire common stock portfolio ($500,000) is allotted to an index fund tracking the Standard & Poors 500 index. The
expected rate of return on the index is 9.5% and the standard deviation is 18% per year. The one-year risk-free rate is 2.0%.
Now Ms. Belle receives a strongly favorable security analyst's report on Mycronics Corp. The analyst projects a return of 25%. Myroncis has a high volatility (40% annual standard deviation) but its correlation coefficient with the S&P 500 is only .3.
Assume the return in the analyst's report is an unbiased forecast.

Should Ms. Belle sell part of her index fund holdings and invest in Myronics? If so, how much?

Answer rating: 100% (QA)

Whether or not Ms Belle should sell part of her index fund holdings and invest in Myronics depends o... View the full answer