You already have a very well-diversified portfolio of common stock with a beta of 2, and you want to add stock AAA or BBB into the portfolio. AAA’s standard deviation is 0.2300 and its beta is 4. BBB’s standard deviation is 0.6500 and its beta is 0.5. How will the addition affect the portfolio’s risk?

If we add more factors into the one-factor asset pricing model, what happens to the required returns, increase or decrease? If the expected future cash flows of the financial securities remain the same, will that increase or decrease the current market price? Why?

Answer rating: 100% (QA)

To evaluate how adding stock AAA or BBB will affect the portfolios risk we need to consider their co... View the full answer