You expect HGH stock have a

$20\%$

return next year and a

$30\%$

volatility. You have

$ $25,000$

to$$ invest, but plan to invest a total of

$ $50,000$

in$$ HGH$,$ raising the additional

$ $25,000$

by shorting either KBH or LWI stock. Both KBH and LWI have an expected return of

$10\%$

and a volatility of

$20\%.$

If KBH has a correlation of

plus $0\mathrm{.}5$

with$$ HGH$,$ and LWI has a correlation of

negative $0\mathrm{.}5$

with$$ HGH$,$ which stock should you$$ short?

Question content area bottom

Part $1$

Which portfolio is$$ superior? Why? $($Select the best choice$$ below.$)$

A$.$

Both portfolios have the same expected$$ return, but shorting KBH is better because we should seek to hold stocks that are positively correlated to reduce volatility.

B$.$

Both portfolios have the same expected$$ return, but shorting LWI is better because we should seek to hold stocks that are positively correlated to reduce volatility.

C$.$

Both portfolios have the same expected$$ return, but shorting LWI is better because we should seek to hold stocks that are negatively correlated to reduce volatility.

D$.$

Both portfolios have the same expected$$ return, but by shorting$$ KBH$,$ we achieve a lower volatility because it has a positive correlation with HGH$.$ By shorting$$ KBH$,$ some of the common risk shared by the stocks is reduced.