Question

Sort the following stocks in the order of the expected return you would need if you had to hold them a.) Individually or b.) as part of a portfolio

Stock Standard Deviation Beta

A 4 1

B 10 -0.5

C 9 -1

D 5 0.5

Answer 1

a) Individually

1.Stock A

2.Stock D

3.Stock C

4.Stock D

Standard deviation indicates the risk associated with individual stock.

Higher the standard deviation, higher volatile the stock is and thereby higher risk.

b) as part of a portfolio

1.Stock A

2.Stock D

3.Stock B

4.Stock C

Beta represents the total risk of the stock with respect to the benchmarked stock exchange returns.

In that case, when Beta is equal to 1 then the stock gives the same returns which the benchmarked stock exchange gives. In case of Beta = -1 then it is totally negatively correlated with the benchmarked stock exchange returns.