Use the information for the question(s)below.
Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%.
-Which stock has the highest total risk?
A)Merck since it has a lower volatility
B)Merck since it has a higher beta
C)Exxon-Mobil since it has a higher volatility
D)Exxon-Mobil since it has a lower beta

Question

Quizplus · Accepted Answer

The total risk of a stock is measured by its volatility multiplied by its beta. Therefore, to compare the total risk of Exxon-Mobil and Merck, we need to calculate their total risk as follows:

Total risk of Exxon-Mobil = Volatility of Exxon-Mobil x Beta of Exxon-Mobil 
= 42% x 0.9 
= 37.8%

Total risk of Merck = Volatility of Merck x Beta of Merck 
= 24% x 1.1 
= 26.4%

Since the total risk of Exxon-Mobil is higher than that of Merck, the answer is C, Exxon-Mobil since it has a higher volatility.

Use the Information for the Question(s)below