17. StockA has an expected return of 7%, a standard deviation of expected return
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17. StockA has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of 0.15, and a beta coefficient of 0.35. Stocke has an expected return of 12%, a standard deviation of returns of 10%, a 0.78 correlation with the market, and a beta coefficient of 1.18. Which security is riskier for a rational diversified investor? Why? 18. Explain the following statement: The stand-alone risk of an individual corporate project may be quite high; but viewed in the context of its effect on stockholders' risk; the project's true risk may not be very large.Explanation / Answer
17. Stock A is riskier in comparsion of of Stock B, since the expected return of A is lower than that of B and the standard deviation of A is higher than B This shows that Stock A is riskier one.
18. When we have a tendency to see the standalone risk of a personal company project we are talking regarding the company risk onlyand it's a perform of the project’s NPV and variance and its correlation with the returns on different comes within the firm. But, the Project's risk to stockholders is that the market risk that takes into thought each the company risk and also the stockholder's risk and this market risk is that the most significant risk between the two because the goal of the management is to maximise stockholder's wealth. These two risks company and market risk aren't extremely related . so, there may be things once the quality deviatio of one capital project s high however the market risk is low as once the stockholder's risk is calculated it takes into thought the accumulative impact of all comes taken along.
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