Final answer:
To have a positive expected return with less risk than the market, a risky security should have a beta less than 1. Beta represents the volatility of a security in relation to the market, with lower beta indicating less risk. Investment choices vary in risk with potential returns often compensating for the level of risk assumed.
Step-by-step explanation:
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta that is less than 1. A beta less than 1 suggests that the security is less volatile than the market. It indicates that while the security has the potential to provide a positive return, its price fluctuations in response to market changes are expected to be less severe compared to the overall market.
The concept of beta is crucial to the Capital Asset Pricing Model (CAPM), which is used to determine the expected return on an asset based on its beta and the expected market returns. Generally, assets with higher betas are seen as riskier since they amplify market movements, whereas those with lower betas are considered less risky. However, it's important to note that lower risk does not necessarily equate to low returns, as the asset may provide meaningful returns with reduced volatility.
Investment choices like stocks, bonds, and bank accounts illustrate the tradeoff between risk and return. While stocks are typically the riskiest, they also offer the possibility for higher returns, which compensates investors for taking on more risk.