If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the lower standard deviation.

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Quizplus · Accepted Answer

When investors hold only one stock, they are more risk-averse and therefore demand a higher expected return for stocks with higher standard deviation. However, when stocks are held in portfolios, investors can diversify their risk and reduce the overall risk of the portfolio. In this case, a stock with a lower standard deviation may be more valuable to the portfolio and may command a higher required return.

If Investors Are Risk Averse and Hold Only One Stock,we