You are considering investing in one of the these three stocks: $$\begin{array} { c c c }
\text { Stock } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 20 \% & 0.59 \
\text { B } & 10 \% & 0.61 \
\text { C } & 12 \% & 1.29
\end{array}$$ If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
A) A; B.
B) B; A.
C) C; A.
D) C; B.
E) A; A.

Question

You are considering investing in one of the these three stocks: $$\begin{array} { c c c } 
\text { Stock } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 20 \% & 0.59 \
\text { B } & 10 \% & 0.61 \
\text { C } & 12 \% & 1.29
\end{array}$$ If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
A) A; B.
B) B; A.
C) C; A.
D) C; B.
E) A; A.

Quizplus · Accepted Answer

When held in isolation, the total risk is considered, which is represented by the standard deviation. Stock B has the lowest standard deviation (10%), indicating it has the lowest total risk when held alone. When part of a well-diversified portfolio, the relevant measure of risk is beta, which measures a stock's volatility relative to the market. Stock A has the lowest beta (0.59), indicating it has the lowest systematic risk when held as part of a diversified portfolio.

You Are Considering Investing in One of the These Three