ambunt of systematic risk as measured by beta ili.the reward for bearing systema
ID: 2806765 • Letter: A
Question
ambunt of systematic risk as measured by beta ili.the reward for bearing systematic risk as meas by the market risk premium v.the reward for bearing risk as measured by th standard deviation Use the table below to answer the next 3 questions: 13. Which stock has the greatest systematic risk? A. A because it has the higher standard deviation B. B because it has the higher beta Stock Standard Deviation Beta 0.25 0.15 0.8 1.1 14. Which stock has the greatest total risk? A. A because it has the higher standard deviation B. B because it has the higher beta 15. According to the CAPM, Which stock should have the greatest expected return? A. B. A because it has the higher standard deviation B because it has the higher beta hich of the following portfolios of stocks is likely to have the least unsystematic risk? Target Nike Best Buy Starbucks Apple Starbucks Ford Nike Apple Apple Ford Microsoft Starbucks Nike Starbucks CVSExplanation / Answer
13.
Systematic risk, also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. thse risk is arise due to market factor that is outside the company and if affect the whole market. beta is a mesure of systematic risk.
Diversifiable risk also called unsystematic risk is company specific risk that can be reduce through diversification of investment. this type of risk is specific to particular firm. unsystematic risk is measured in term of standard deviation.
a.
Beta of stock B is higher than Beta of stock A, so, systematic risk of stock B is higher than systematic risk of stock A.
14.
Total risk is summation of systeamtic risk and unsystematic risk. Since unsystematic risk can be eliminate thorugh diversification, so a stock with higher beta have high total risk.
15.
Expected return of stock using CAPM model is calculated using following formula:
Expected rate of return = Risk free rate + (Market return - Risk free rate) × Beta
So, if beta of stock is high then expected rate of return will also high.
So stock B have higher expected rate of return.
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