You must add one of two investments to an already well-diversified portfolio Sec

Question

You must add one of two investments to an already well-diversified portfolio Security A. Security B Expected return = 12%. Expected return a 12% Standard deviation of. Standard deviation of
Returns = 20.9%. Returns = 10.1% Beta = .8%. Beta = 2
If you are a risk averse investor which one is a better choice?
A B Either Can not determine with information given You must add one of two investments to an already well-diversified portfolio Security A. Security B Expected return = 12%. Expected return a 12% Standard deviation of. Standard deviation of
Returns = 20.9%. Returns = 10.1% Beta = .8%. Beta = 2
If you are a risk averse investor which one is a better choice?
A B Either Can not determine with information given Security A. Security B Expected return = 12%. Expected return a 12% Standard deviation of. Standard deviation of
Returns = 20.9%. Returns = 10.1% Beta = .8%. Beta = 2
If you are a risk averse investor which one is a better choice?
A B Either Can not determine with information given

Explanation / Answer

Answer: Security A is the better choice.

Explanation:

Standard deviation signifies total risk of a security whereas Beta signifies systematic risk. Systematic risk cannot be diversified, though unsystematic risk can be diversified.

Since the existing portfolio is well diversified, the unsystematic risk is not very relevant. On the other hand, the systematic risk signified by Beta is relevant as it cannot be diversified. Hence, it is preferable to add the security which has lower beta; in this case Security A.

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