Security A has an expected return of 7%, a standard deviation of returns of 35%,
ID: 2667018 • Letter: S
Question
Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5.Security B has and expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0.
Which security is risker? Why?
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I need someone to explain this plain English, what makes Security A more riskier. Why? Can you please do the mathematical equation so I can see for myself? What is the mathematical equation needed to successful solve this problem?
Explanation / Answer
Security A is minutely risky if held in a diversified portfolio because of its lower beta and negative correlation with other stocks. In a single-asset portfolio, Security A would be additionally risky because A > B and CVA > CVB.