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 low standard deviation.

Question

Quizplus · Accepted Answer

When stocks are held in portfolios, the required return could be higher on the stock with the low standard deviation because it may provide diversification benefits, reducing the overall risk of the portfolio. Therefore, investors may accept a lower required rate of return on a stock with lower volatility in order to achieve a diversified portfolio with lower overall risk.

Investors Are Risk Averse and Hold Only One Stock, We