The Allied Group has acquired Kramer Industries and is now considering additional investments. They have determined that there is a firm that is a good fit for their portfolio, the Kramer firm of Montana. The firm was established in 1990 and has the following historical returns:
Kramer Industries Year Earnings
1990 (8% Loss)
1995 23%
2000 26%
2005 31%
2010 18%
What was the average return for the stock over the period of 1990 through 2010? What was the standard deviation for the stock over this period?
Assume that you currently have a portfolio that returns 19.5%. If you add this stock to the current portfolio, what would happen to the average return on the portfolio? Should Allied invest in the stock? Justify your response.
