You are considering investing in one of these three stocks: $\begin{array}{ccc}
\text { Stock } & \text { Standard Deviation } & \text { Beta } \
\mathrm{A} & 20 \% & 0.59 \
\mathrm{~B} & 10 \% & 0.61 \
\mathrm{C} & 12 \% & 1.29
\end{array}$
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.

Question

Quizplus · Accepted Answer

As a strict risk minimizer, we would choose the stock with the lowest standard deviation, which is Stock B.
If we are considering holding the stock as part of a well-diversified portfolio, we also need to take beta into account. A stock with a beta closer to 1 would be better suited for a well-diversified portfolio because it would move in sync with the overall market. Stock B has a slightly higher beta than Stock A and is therefore a better choice for a well-diversified portfolio.

You Are Considering Investing in One of These Three Stocks