Question

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? Explain.

Answer 1

Common stock A is riskier than common stock B based on its higher standard deviation and beta.

Step-by-step explanation:

Common stock A has a higher standard deviation of future returns (25%) compared to common stock B (15%). This means that stock A has a higher level of volatility or risk, as the returns can vary more widely. Additionally, stock A has a higher beta (1.25) compared to stock B (1.50).

Beta measures the sensitivity of a stock's returns to the overall market returns. A higher beta indicates a higher level of systematic risk. Therefore, based on the higher standard deviation and beta, stock A is considered riskier than stock B.