Security Alpha Ltd Gamma Ltd Market
Alpha Ltd 0.040
Gamma Ltd 0.018 0.090
Market 0.015 0.009 0.010
Assume that you have $50,000 available to invest. You form a portfolio by investing $20,000
in Alpha Ltd and the rest in Gamma Ltd.
a) Compute the standard deviation of this portfolio.
b) Compute the beta of each stock and the portfolio in part (a).
c) One of your clients, Ian Vesta, is considering investing in the above securities. Ian is quite a risk averse investor. He notices that Alpha Ltd and Gamma Ltd appear to be much more risky than the market portfolio, and he is quite concerned that Gamma Ltd is considerably more risky than Alpha Ltd. He concludes that he should not invest in Gamma Ltd’s shares for that reason. Is Ian correct? What advice would you give him? Explain.