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 low standard deviation.

Question

Quizplus · Accepted Answer

When investors hold only one stock and are risk averse, they require a higher rate of return on a stock with a higher standard deviation. However, when stocks are held in portfolios, the required return could be higher on a stock with a lower standard deviation, as it may contribute to the diversification of the portfolio, reducing overall risk.

If Investors Are Risk Averse and Hold Only One Stock