The Allied Group is considering investing in Kramer Industries of Montana. Kramer Industries was established in 1990 and has averaged a 23.4% annual return over the period from 1990 to 2010 with a standard deviation of 9.2%. Adding Kramer Industries to a portfolio already earning 19.5% would increase the average portfolio return. Given its strong historical returns and ability to increase the overall portfolio return, Allied should invest in Kramer Industries.

1. 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%
Questions: Address all of the following questions in a brief but
thorough manner.
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.