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The stocks of Firm A and Firm B each have the same beta, but the standard...

The stocks of Firm A and Firm B each have the same beta, but the standard deviation of Firm A’s investment projects is higher than Firm B’s. Which firm has the lower firm-specific risk? Which firm has the lower systematic risk?

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Answer #1

Beta is a representation of the systematic risk so the stock which will have a higher beta will be representing that this will be having a higher systematic risk, so it can be said that firm A and B will be having similar beta so both the form will be having similar systematic risk.

Firm A is having higher standard deviation of investment project so it can be said that it firm A will be having a higher firm specific risk and firm B will be having a lower firm specific risk, because standard deviation Is a measurement of overall portfolio risk and it will be representing that firm A is having a higher unsystematic risk which is also known as firm specific risk.

Firm A=higher firm specific risk

Firm B= lower firm specific risk

Firm A & Firm B= similar systematic risk.

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