Question

You have the following data on three stocks: STOCK STANDARD DEVIATION BETA A 10% 1.29 B 12% .69 C 20% .59 If you are a strict risk minimizer, you would chose stock , if its to be held in a well diversified portfolio and stock , if it is to be held in isolation.

Answer 1

In a well diversified portfolio, the risk of the stock is designated by systematic risk or Beta of the stock. Lower the beta, lower is the risk that stock adds to diversified portfolio. So, in this case, you would look to add Stock C(lowest beta).

In an isolated investment, the risk of the stock is designated by standard deviation which includes both systematic risk as well as unsystematic risk. Lower the standard deviation, lower is the risk that stock adds to isolated investment. So, in this case, you would look to add Stock A (lowest standard deviation).