The answer to the question is highlighted in red. Explanations are highlighted in green.

 

13.    According to the following information, which of the stocks would be considered riskiest if it is held by itself—that is, there are no other investments in the portfolio?

 

                                    Stock                    s                      b         

                                    ABC                  12.5%                1.0

                                    FGH                    8.0                   0.5

                                    MNO                 20.2                   2.4

                                    TUV                  15.3                   3.0

 

            a.   Stock MNO, because it has the highest standard deviation.

            b.   Stock TUV, because it has the highest beta.

            c.   Stock FGH, because it has the highest s/b ratio.

                  d.    Stock ABC, because its beta is the same as the market beta (1.0) and the market is always very, very risky.

                  e.     None of the above is a risky investment.

 

                          Explanation: The stand-alone risk associated with an investment is measured by its standard deviation. This risk is borne by investors who hold only the one investment—that is, they have a single-investment portfolio. For investors who diversify by forming portfolios that consist of many investments, Stock TUV would be considered riskiest because it has the highest beta coefficient, which is a measure of the risk the stock will add to a portfolio.

 

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