Question

You have developed the following data on three stocks: Stock A has a standard deviation of...

You have developed the following data on three stocks: Stock A has a standard deviation of .15 and a Beta of .79. Stock B has a standard deviation of .25 and a Beta of .61. Stock C has a standard deviation of .20 and a Beta of 1.29. If you are a risk minimizer, you should choose Stock _____ if it is to be held in isolation and Stock _____ if it is to be held as part of a well-diversified portfolio. Please select from: A, A A, B B, B C, A C, B

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Answer #1

For a well diversified investor, the standalone risk or standard deviation of the stocks is mitigated. So, in that the relevant risk would be the market risk or the beta.

When you see in isolation, the standard deviation would be relevant risk.

Therefore, if you are a risk minimizer, you should choose stock A (lowest standard deviation) if it is to be helf in isolation and stock B (lowest beta) if it is to be held as part of a well - diversified portfolio. (A, B)

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