23) You are thinking of adding one of two investments to an already well diversi

Question

23) You are thinking of adding one of two investments to an already well diversified portfolio. Security A Expected return 15% Standard deviation of returns Beta 3.8 Security B Expected return-15% Standard deviation of returns 10% 20.1% Beta = 2.5 If you are a risk-averse investor A) Security A B) Security B C) either is OK D) cannot be determined with information given. 3872.5. A stock is expected to return l 1% in a normal economy, 19% if the economy boom lose 8% if the economy moves into a recessionary period. Economists predict a 65 al economy, a 25% chance of a boom, and a 10% chance of a reco

Explanation / Answer

23.

Both securities provide similar return. Standalone risk (Standard deviation) fro security A is 10% and for security B is 20.10%. Market risk (Beta) for securities A is 3.80 and for securities B is 2.50%.

Standalone risk can be manage and reduce by diversification but market risk cannot be reduced. So an risk averse investor invest in security with lower market risk.

So he should invest in security B.

Option (B) is correct answer.

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