Question

2. Within the framework of the CAPM: If stock A has a higher standard deviation and a higher correlation with the market portfolio than stock B, then A’s beta is higher than B’s beta. (yes or no and give explanation to justify your answer)

Answer 1

Answer-

The answer is Yes. The stock A's beta will be higher than stock B's beta. A stock with higher standard deviation will have higher risk and will automatically contribute a lot of risk to the portfolio.

As the stock A has higher correlation with the market portfolio means that the diversificaion will not be of any significance and the stock A which has high risk will add to overall risk to the market portfolio and will have a higher beta than the other stock B which has lower standard devation and lower risk.

in general we can conclude that the stock with higher standard deviation and higher correlation will have higher risk and higher beta value than a stock with lower standard deviation and lower risk.