Question

6. As an analyst you have gathered the following information:

Security	Expected Annual Return	Expected Standard Deviation	Correlation between Security and the Market
Security 1	11%	25%	0.6
Security 2	11%	20%	0.7
Security 3	14%	20%	0.8
Market	10%	15%	1.0

(i). Compute the total variance on all securities and identify the security which has the highest total risk?

(ii). Compute the market risk for all securities and identify the security which has the highest and least market risk?

(iii). Which security has the least amount of market risk?

Answer 1

1) calculating variance of all securities

Security 1 =.25^2 = .0625

Security 2 = .20^2 =.04

Security 3 = .20^2 = .04

Security 1 has the highest variance compare to other securities so security 1 has the highest total risk

2) Market risk of the securities

Beta = (correlation*Security standard deviation)/ Market return

Security 1= (.6)(.25)/.10 =1.5

Security 2 =(.7)(.20)/.10 =1.4

Security 3 = (.8)(.20)/.10 =1.6

Here, the security 3 has highest market beta 1.6. So, security 3 has highest market risk

3) Security 2 has the lowest amount of Market risk. It has the lowest bea 1.4 So it the lowest market risk