Calculating Risk Using Beta & Standard Deviation of Return

Common stock A has an expected return of 10%, a standard deviation of future returns of 25%, and a beta of 1.25. Common stock B has an expected return of 12%, a standard deviation of future returns of 15%, and a beta of 1.50. Which stock is riskier?

Please see the attached excel file which has the answers to the questions in an excel spreadshseet.

(see attachment for data table)

Which stock is riskier?

The risk of holding a stock has two components- systematic risk and unsystematic (unique) risk
Thus, Total risk = Systematic risk + Unsystematic risk

Systematic risk, also called market risk, influences a large number of firms..
Unsystematic (unique) risk affects a single firm or a small number of firms.

Systematic Risk is the risk associated with macroeconomic factors such as inflation, recession, changes in interest rates, natural shocks like hurricanes, droughts, earthquakes and by war and other political events etc.

Unsystematic (unique) risk is associated with company specific evants such as labor problems, litigation, company winning contracts, changes in management of a ...

Solution Summary

Questions on risk (as measured by beta and standard deviation of return) and return have been answered clearly and extensively in words with references.

... Security Mark Line), what is the risk-free rate ... a. Use a spreadsheet (or calculator with a linear ...Calculate the standard deviations of returns for both Stock X ...

... SML gives an equation that calculates the expected ... and standard deviation of market portfolio (calculated above) Therefore, we can calculate the beta...

How to calculate the following- expected return and standard deviation...Calculated above) We have calculated σ ... The solution calculate the expected return and ...

...beta of stock= beta A= 1.68 (calculated above) return... We first calculate required returns using CAPM and ...returns, standard deviation of return, beta, risk etc. ...

... The solution calculates the expected rate of return on a ... 4.12% (Calculated above) We have calculated σM =Standard... previous step Thus we can calculate the beta. ...

... Though this is not rquired, we may calculate the sM ... the second case E(r) is to be calculated However, since ... it has unique risk apart from systemic risk We will ...

...Calculate the standard deviations of returns for both Stock X ...Risk free rate is calculated assuming that the stock ... a. Use a spreadsheet (or calculator with a ...

...beta for the two stocks is calculated first using... Capital Asset Pricing Model) equation to calculate the required ... The risk-free rate is 6%, and the required ...

... b. Calculate the standard deviation of a portfolio that is ... the above procedure σ= 3% E(r) can be calculated. ... C 12,000 1.4 Stock D 13,000 1.9 The risk-free rate ...