Question

Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which of these measures best captures the risk of an asset when we think about the return we expect from that asset? Explain.

Answer #1

Both Beta in the CAPM and the standard deviation measure the
risk of any asset. Which of these measures best captures the risk
of an asset when we think about the return we expect from that
asset? Please explain.

Standard deviation and beta are both used to measure the risk of
a stock. Explain each measure- what does it mean and how is it
calculated? Which measure would you recommend for a
well-diversified investor? Why?

The CAPM is used to price the risk (estimate the expected
return) for any asset. Our examples have focused on stocks, but we
could also use CAPM to estimate the expected rate of return for
bonds. Explain why.

3. We have 10 stocks with the same standard deviation of 20%.
Assume CAPM market beta captures all undiversifiable risk.
a. If all 10 stocks all have zero
market beta, what is the standard deviation of an equally-weighted
portfolio of these 10 stocks?
b. If all 10 stocks all have a market
beta of 1, what is the standard deviation of an equally-weighted
portfolio of these 10 stocks?

The standard deviation of Asset A returns is 36%, while the
standard deviation of Asset M returns is 24%. The correlation
between Asset A and Asset M returns is 0.4.
(a) The average of Asset A and Asset M’s standard deviations is
(36+24)/2 = 30%. Consider a portfolio, P, with 50% of funds in
Asset A and 50% of funds in Asset M. Will the standard deviation of
portfolio P’s returns be greater than, equal to, or less than 30%?...

Which of the following measures;standard deviation coefficient
of variation beta best represent the risk each dtocks contributions
to the above portfolio

In the context of CAPM/SML, which of these is not true about
Beta:
it is fairly stable over time
it shows how much on average the stock price changed when the
market return moved +/- 1%
it measures unsystematic risk
it is estimated by running a regression of stock returns vs
market returns

Q.8 Consider the following
assets:
asset
Expected return
Standard deviation
Beta
Risk-free asset
0.06
0
0
Market portfolio
0.22
0.20
1
Stock E
0.24
0.25
1.25
An investor wants to earn 24%, which one of the following
strategies is optimal? Explain why suboptimal strategies should not
be chosen.
Borrow at the risk-free rate and invest in stock E because the
risk –free asset will offset some of the risk of stock E.
Borrow at the risk-free rate and invest in...

Q2: How to compute the expected return and the risk (standard
deviation) for a two-stock portfolio?
Q3: In CAPM, what’s beta? What kind of risk is the beta used to
measure? How to calculate an individual stock’s beta based on its
definition?

Beta measures_____risk while standard deviation measures ____
risk.

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