George wants to pick a stock for his Diversified Hedge Fund. The fund has holdings in every country with a stock market. George is trying to decide which asset he should add to his portfolio: Stock A or Stock B. Expected return, Standard deviation and beta values for the two stocks are outlined in the table below. Which stock is best for George's portfolio and why? $$\begin{array} { | c | c | c | c | }
\hline & \text { Stock A } & \text { Stock B } & \text { Risk-Free Asset } \
\hline \begin{array} { c }
\text { Expected } \
\text { Return }
\end{array} & 8 \% & 12 \% & 5 \% \
\hline \begin{array} { c }
\text { Standard } \
\text { Deviation }
\end{array} & 12 \% & 22 \% & \
\hline \text { Beta } & 1 & 2 & \
\hline
\end{array}$$
A)Stock A because it has a lower Beta.
B)Stock A because it has more return per unit of standard deviation.
C)Stock B because it has a higher return.
D)Stock B because it has a higher Treynor Index with respect to standard deviation.
E)Stock B because it has a higher Treynor Index with respect to Beta.

Question

George wants to pick a stock for his Diversified Hedge Fund. The fund has holdings in every country with a stock market. George is trying to decide which asset he should add to his portfolio: Stock A or Stock B. Expected return, Standard deviation and beta values for the two stocks are outlined in the table below. Which stock is best for George's portfolio and why? $$\begin{array} { | c | c | c | c | } 
\hline & \text { Stock A } & \text { Stock B } & \text { Risk-Free Asset } \
\hline \begin{array} { c } 
\text { Expected } \
\text { Return }
\end{array} & 8 \% & 12 \% & 5 \% \
\hline \begin{array} { c } 
\text { Standard } \
\text { Deviation }
\end{array} & 12 \% & 22 \% & \
\hline \text { Beta } & 1 & 2 & \
\hline
\end{array}$$
A)Stock A because it has a lower Beta.
B)Stock A because it has more return per unit of standard deviation.
C)Stock B because it has a higher return.
D)Stock B because it has a higher Treynor Index with respect to standard deviation.
E)Stock B because it has a higher Treynor Index with respect to Beta.

Quizplus · Accepted Answer

Stock B has a higher Treynor Index with respect to Beta, which means it has a higher return per unit of systematic risk. This makes it a more attractive investment for George's portfolio, which is already diversified and therefore not as concerned with unsystematic risk.

George Wants to Pick a Stock for His Diversified Hedge