You are currently only invested in the Natasha Fund? (aside from? risk-free securities). It has an expected return of 14 % with a volatility of 19 %. Currently, the? risk-free rate of interest is 3.9 %. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an expected return of 20 %, a volatility of 60 %, and a correlation of 0? (zero) with the Natasha Fund.
a. Calculate the required return of Hannah stock. Is your broker? right?
b. You follow your? broker's advice and make a substantial investment in Hannah stock so? that, considering only your risky? investments, 65 % is in the Natasha Fund and 35 % is in Hannah stock. When you tell your finance professor about your? investment, he says that you made a mistake and should reduce your investment in Hannah. Recalculate the required return on Hannah stock. Is your finance professor? right?
c. You decide to follow your finance? professor's advice and reduce your exposure to Hannah. Now Hannah represents 13.782 % of your risky? portfolio, with the rest in the Natasha fund. Recalculate the required return on Hannah stock. Is this the correct amount of Hannah stock to? hold?
Hint?: Make sure to round all intermediate calculations to at least five decimal places.