An investor currently holds stock in Giggle Corporation and is considering buying stock in either Macrosoft Corporation or Faceplant Corporation. All three stocks have the same expected return and risk. The correlation between Giggle & Macrosoft is 0.25. The correlation between Giggle and Faceplant is -0.10. Portfolio risk is expected to:
a. Increase regardless of whether she buys Macrosoft or Faceplant since they are equally risky
b. Decline more when the investor buys Faceplant
c. Cannot tell from information provided – need to know risk, return and proportion of each stock in the portfolio
d. Stay the same regardless of whether Macrosoft or Faceplant is added since all three have the same risk
e. Decrease more when the investor buys Macrosoft
Answers: 1
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