Firm A has a beta of 1.0 and a standard deviation of 40%. Firm B has a beta of 2

Question

Firm A has a beta of 1.0 and a standard deviation of 40%. Firm B has a beta of 2.0 and a standard deviation of 20%. Both securities have the same expected return based on their individual probability distributions. Which of the following statements is true about Firm A? [I] Firm A is as volatile as a well-diversified market index [II] Firm A is less risky than Firm B if both securities were held in a well-diversified portfolio. [III] Overall, Firm A is twice as risky as Firm B when the absolute risk exposure of the securities is considered. [IV] Firm A is more risky than Firm B if held in a well-diversified portfolio. [V] If each security is to be held as a single investment, Firm A is more superior than Firm B.

I, II, III

I, III, IV

II, IV, V

None of the above is entirely accurate

I, II, III

I, III, IV

II, IV, V

None of the above is entirely accurate

Explanation / Answer

ANS. I,II,III

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