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Choose the correct answer for the following: (1) Which is the best measure of risk for...

Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio? why are these the correct answers?

Variance; correlation coefficient

Standard deviation; correlation coefficient

Beta; Variance

Coefficient of variation; beta

Beta; beta

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Answer #1

For isolation security the co-efficient of variation is better measure because it considering both mean as well as standard deviation that means it focuses on both risk as well as return.

For diversified portfolio BETA is best measure of risk. Because any stock is having two types of risk one the diversifiable and an diversifiable the portfolio is diversified so it only contains Undiversifiable risk(BETA). So diversified portfolio have to focus much on Undiversifiable risk that is why the beta is best measure of risk for diversified portfolio.

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