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Your sister is considering to add one additional stock to a three stock portfolio, to form a four stock portfolio. The three stocks currently held all have b=1.0, and they are perfectly positively correlated with the market. Potential new stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r=0.75. However, stock A's standard deviation of returns is 12% versus 8% for stock B. Why should i add additional stock to my sister's portfolio?

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Financial Management, Finance

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