Purchase Solution

Riskiness of Stock and Diversification

Not what you're looking for?

Ask Custom Question

The figures (attached) shows plots of monthly rates of return and the stock market for two stocks.

a. Which stock is riskiest to an investor currently holding her portfolio in a diversified portfolio of common stock?
b. Which stock is riskiest to an undiversified investor who puts all of his funds in only one of these stocks?

Attachments
Purchase this Solution
Solution Summary

The solution explains how to evaluate the riskiness of a stock.

Solution Preview

Let the first figure be Stock A and the second figure be Stock B. The graph shows the securities characteristic line which is a plot of execs returns of a stock versus the excess returns of the market. The slope of the line is the beta of the stock.

Which stock is riskiest to an investor currently holding her portfolio in a diversified portfolio of common stock?

The risk of the diversified portfolio ...

Purchase this Solution
Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

View More Free Quizzes
Related BrainMass Solutions

  • Single stock portfolio / 100 stock portfolio

    Your objective is to minimize the riskiness of the stock and so you should choose a stock with the lowest standard deviation of returns. This stock will have the lowest risk. b.

  • Total Risk

    374571 Common stock 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.

  • Short Term Financial Risk Concepts

    So if a stock had a beta of 2.0, it would mean that the stock is on average expected to move twice as much as the stock market. It is a measure of the riskiness of the stock or portfolio relative to the market.

  • Discount Rate Explanation

    This type of risk is addressed by the CAPM, which describes the relationship between risk and rates or return. According to the CAPM, the relevant riskiness of an individual stock is its contribution to the riskiness of a well-diversified portfolio.

  • Multinational firms riskier than purely domestic firms

    Thus, even though the riskiness of operating in any one country may exceed the risk of operating in the United States (or other home country), much of that risk is eliminated through diversification.

  • Portfolio Risk Management, Systematic Risk and Unsystematic Risk

    hold a diversified portfolio of stocks (~30 of stocks to acquire the optimal diversification benefits) instead of holding 1-stock portfolio.

  • Risk Assessment using Scatter Diagrams & Regression Analysis

    Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y's volatility and relative riskiness as compared with those of other stocks. c.

  • Discounted cash flow method of valuation

    Investors are also concerned with the riskiness of their portfolios rather than the riskiness of the individual securities in the portfolio. The solution examines the discounted cash flow method of valuation. Beta measure risks are analyzed.

  • Factors affecting the price of a stock

    502758 Factors affecting the price of a stock Two people agree on the riskiness of a stock, they also agree on the expected value of D1 and on the expected future dividend growth rate.

View More Related Solutions