Standard deviation of stock 1 | |||||
A | B | C = A*B | D = B - X" | E = D^2 | F = A * E |
p | x | px | dx = x - X" | dx^2 | p*dx^2 |
0.26 | 0.03 | 0.0078 | -0.106 | 0.011236 | 0.00292136 |
0.56 | 0.2 | 0.112 | 0.064 | 0.004096 | 0.00229376 |
0.18 | 0.09 | 0.0162 | -0.046 | 0.002116 | 0.00038088 |
X" = sum of px | 0.136 | Variance | 0.005596 | ||
Variance = | 0.005596 | ||||
Standard deviation of stock 1 = Square root of variance | |||||
SD = | 0.074806417 | ||||
SD % = | 7.48% | ||||
where X" refers to expected return |
Standard deviation of stock 2 | |||||
A | B | C = A*B | D = B - X" | E = D^2 | F = A * E |
p | x | px | dx = x - X" | dx^2 | p*dx^2 |
0.26 | -0.34 | -0.0884 | -0.4272 | 0.18249984 | 0.047449958 |
0.56 | 0.14 | 0.0784 | 0.0528 | 0.00278784 | 0.00156119 |
0.18 | 0.54 | 0.0972 | 0.4528 | 0.20502784 | 0.036905011 |
X" = sum of px | 0.0872 | Variance | 0.08591616 | ||
Variance = | 0.08591616 | ||||
Standard deviation of stock 2 = Square root of variance | |||||
SD = | 0.293114585 | ||||
SD % = | 29.31% | ||||
where X" refers to expected return |
Beta of stock 1 | ||
Expected return of stock 1 = RF + Beta * (RM - RF) | ||
13.6% = | 3% + Beta * 5% | |
Solving, we get the value of Beta as | ||
Beta of stock 1 | 2.12 |
Beta of stock 2 | ||
Expected return of stock 2 = RF + Beta * (RM - RF) | ||
8.72% = | 3% + Beta * 5% | |
Solving, we get the value of Beta as | ||
Beta of stock 2 | 1.144 |
Answer: | |
Standard deviation of Stock 1 | 7.48% |
Beta of Stock 1 | 2.12 |
Standard deviation of Stock 2 | 29.31% |
Beta of Stock 2 | 1.144 |
Based on Beta, the riskier stock is | Stock 1 |
(The stock with higher beta is more volatile, therefore, risk is higher) |
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