You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states "We have too much of our portfolio in Alpha. We should probably move some of those funds into Gamma so we can achieve better diversification." Is he right? [Hint: Feel free to use spreadsheet statistical functions.] Here is the data on all three stocks. Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price 40; Current Weight 80%; Next Year's Price: Expansion 48, Normal 44, Recession 36; Beta, Current Price 27.50; Current Weight 20%; Next Year's Price: Expansion 27.50, Normal 26, Recession 25; Gamma, Current Price 15; Current Weight 0%; Next Year's Price: Expansion 16.50, Normal 19.50, Recession 12.
No.
Yes.
It depends.
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