Sonny owns $5,000 worth of High Risk Enterprises (HRE) stock. HRE has a standard deviation of 16 percent and a beta of 2.0. He wants to invest another $5,000 and create a $10,000 portfolio that is equally as risky as the overall market. Which one of the following will accomplish his goal?

A. invest the additional $5,000 in a security that is equally as risky as the market
B. sell HRE and invest the entire $10,000 in risk-free securities
C. sell HRE and invest $5,000 in risk-free securities and $5,000 in a stock that has a standard deviation of 4 percent
D. invest the additional $5,000 in a stock that has a standard deviation of 4 percent
E. invest the additional $5,000 in risk-free securities

In order to create a $10,000 portfolio that is equally as risky as the overall market, Sonny needs to consider the beta of the stock he will invest in with the additional $5,000. Beta measures the sensitivity of a stock's returns to the overall market returns. A beta of 1.0 indicates that the stock moves in line with the market, while a beta greater than 1.0 indicates higher volatility than the market and a beta less than 1.0 indicates lower volatility than the market.

To determine which option will accomplish Sonny's goal, we need to compare the beta of HRE to the beta of the potential investments.

Option A: Investing the additional $5,000 in a security that is equally as risky as the market may or may not be the correct choice. We do not have information about the beta of the potential investment.

Option B: Selling HRE and investing the entire $10,000 in risk-free securities will make the portfolio less risky than the market. Risk-free securities have a beta of 0, so the overall beta for the portfolio will be less than 1.0. This option does not accomplish Sonny's goal.

Option C: Selling HRE and investing $5,000 in risk-free securities and $5,000 in a stock that has a standard deviation of 4 percent may or may not accomplish Sonny's goal. We need to check the beta of the second stock to determine if the portfolio will be equally as risky as the market.

Option D: Investing the additional $5,000 in a stock that has a standard deviation of 4 percent may or may not accomplish Sonny's goal. Again, we need to check the beta of the potential investment.

Option E: Investing the additional $5,000 in risk-free securities will make the portfolio less risky than the market. As mentioned earlier, risk-free securities have a beta of 0, so the overall beta for the portfolio will be less than 1.0. This option does not accomplish Sonny's goal.

In conclusion, we need to check the beta of the potential investments in options A, C, and D to determine which one will accomplish Sonny's goal of creating a $10,000 portfolio that is equally as risky as the overall market.