10.2 Stock A has an expected rate of return of 8 percent, a standard deviation o

Question

10.2 Stock A has an expected rate of return of 8 percent, a standard deviation of 20 percent, and a market beta of 0.5. Stock B has an expected rate of return of 12 percent, a standard deviation of 15 percent, and a market beta of 1.5. Which investment is riskier? Why? (Hint: Remember that the risk of an investment depends on its context.)

If Investment made on Diversified Portfolio than Stock B is more risky then compared to stock A as per CAPM

Whereas Investment is only on one stock then more risky investment is Stock A as per Coeffient of Variation

Explanation / Answer

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Stock A has an expected rate of return of 8 percent, a standard deviation of 20 percent, and a market beta of 0.5. Stock B has an expected rate of return of 12 percent, a standard deviation of 15 percent, and market beta of 1.5. Which investment is riskier? Why? (Hint: Remember that the risk of an investment depends on its content.)

Answer

A security risk can be measured by Beta & Standard Risk. SD incorporate the risk of stock internal & external risk. Internal risk can be diversified by the portfolio management , therefore As per CAPM , beta incorporate only External risk which cannot be diversified. Herestock B has more beta. Thus,

If Investment made on Diversified Portfolio thanStock B is more risky then compared to stock A as per CAPM

Whereas Investment is only on one stock then more riskier investment is Stock A as per Coeffient of Variation

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