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We are asked to compare the risk between two stocks. Suppose standard deviation of APPLE is...

We are asked to compare the risk between two stocks. Suppose standard deviation of APPLE is 16% and beta of APPLE is 1.5 ; Standard deviation of IBM is 24% and beta of IBM is 0.9 . _____ stock is safer for an diversified investor; _____ stock is safer for an undiversified investor.

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Answer #1

For a diversified investor, relevant risk metric is Beta. Higher the beta, higher is the systematic risk of the stock. Hence the safer stock for diversified investor is one with lower beta. Hence, IBM is safer for a diversified investor.

For an undiversified investor, relevant risk metric is standard deviation. Higher the standard deviation, higher is the total risk of the stock. Hence the safer stock for undiversified investor is one with lower standard deviation. Hence, Apple is safer for an undiversified investor.

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