Consider the following case: Andre is an amatuer investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: |Stock|Percentage of Portfolio|Expected Return|Standard Deviation
|Babish & Co.||30%||14.00%||42.00%|
What is the expected return of Andre’s stock portfolio?
Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p=0.4) with each of the other stocks. The market’s average standard deviation is around 20% and the weighted average of the risk of the individual securities in the partially diversified portfolio of four stocks is 43%. If 40 additional, randomly selected stocks with a correlation coefficient of 0.3 with the other stocks in the portfolio were added to the portfolio, what effect would this have on the portfolio’s standard deviation?
a.) It would gradually settle at about 20%.
b.) It would gradually settle at about 35%.
c.) It would decrease gradually, settling at about 0%.
d.) It would stay constant at 43%.