Question

Below is information on three stocks that the Joker intends to buy.

Stock	Beta	Standard Deviation
A	0.85	0.17
B	0.67	0.27
C	1.36	0.22

1. If the Joker wants to lower his risk and keep the stock by itself, he would choose Stock ______.

AND

2. If the Joker wants to have a well-diversified portfolio, he would choose Stock ______.

A & B

B & C

C & A

C & B

A & A

Answer 1

If the portfolio is not well diversified, total risk is more relevant. Total risk is measured using standard deviation

If the portfolio is well diversified, there is no unsystematic risk and only risk involved is systematic risk which is measured using Beta.

Therefore,

(1) If the joker wants to lower his risk and keep the stock by itself, he would choose stock A (since it has lowest standard deviation)

(1) I If the Joker wants to have a well-diversified portfolio, he would choose Stock A &B (since A & B has lower Beta compared to stock C.Joker has to buy more than 1 stock in order to get diversification benefits. So he can't select B & B)