Question

You have analyzed four stocks and obtained the following results:

Stock   Return    Standard   Beta  

K 22% 35% 2.8

I 10% 17% 0.8

N 8% 15% 0.2

G 10% 13% 0.5

Refer to the information above. A risk-averse investor, who will be adding the stock to his already well-diversified portfolio, would choose to invest in Stock

A) K

B) I

C) N

D) G

Answer 1

A risk averse investor would not be investing in stock having beta 2.8 and standard deviation of 35% even though his portfolio is well diversified because this a very high beta stock.So he would refrain from investing into Stock K.

He will not prefer to invest in stock G and stock I because Stock G offers same return as Stock I and both have higher beta than stock N .So he will choose Stock N.

He'll choose stock N because it is offering the lowest rate of beta and a good return in comparison with Stock G and stock I as he is a risk averse Investor and he would like to choose stock with lowest beta.

So the answer will be OPTION (C) STOCK N.