You have developed the following data on three shares: If you are a risk minimiser, you should choose Share __________ if it is to be held in isolation and Share __________ if it is to be held as part of a well-diversified portfolio.

Question

You have developed the following data on three shares:  If you are a risk minimiser, you should choose Share __________ if it is to be held in isolation and Share __________ if it is to be held as part of a well-diversified portfolio.

Quizplus · Accepted Answer

To determine which share is the best choice for a risk minimizer, we need to consider some key measures of risk: expected return, standard deviation, and beta.

Based on the data given, Share A has the highest expected return, but also has the highest standard deviation and beta. This means that while it has the potential for high returns, it also has a higher risk of volatility and its returns are more closely tied to market movements.

Share C, on the other hand, has the lowest expected return, but also the lowest standard deviation and beta. This means it has lower risk and is less affected by market movements, but also has a lower potential for returns.

Share B falls somewhere in between, with a moderate expected return, standard deviation, and beta.

For an investor looking to minimize risk when holding the stock in isolation (i.e. not part of a diversified portfolio), Share A would not be the best choice. Share B or Share C would be better options, as they both have lower risk profiles. However, if the stock is part of a well-diversified portfolio, it is reasonable to include Share A due to its high potential returns. In this case, the best choice would be Share B.

Therefore, the answer is B: A; B.

You Have Developed the Following Data on Three Shares