Question

You are considering investing in on of the following stocks: Stock A has a beta of 1.29 and a standard deviation of 20%, Stock B has a beta of 0.61 and a standard deviation of 10%, and Stock C has a beta of 0.59 and a standard deviation of 12%. If you are a risk averse investor, you would choose Stock _____ and Stock ______ if it is to be held as part of a well-diversified portfolio.

		C; B
		A; B
		B; A
		A; C

Answer 1

The best measure of risk for a single asset held in isolation is coefficient of variation. If standard deviation is less, considering same refurn, coefficient of variation will also be less. And the best measure of risk for an asset held in a diversed portdolio is beta.

So, if you are a risk averse investor, you should choose Stock B, and if it is to be a part of well diversed portfolio, you should choose the stock with lowest beta, which is Stock C.

Among the options, we have B for risk averse investor in 3rd option only.

So, B; A (Option 3).