Question

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk? |

A. GM, XOM
B. XOM, XOM
C. XOM, GM
D. GM, GM

Answer 1

General Motors (GM) has both higher systematic risk, as indicated by a higher beta of 1.5, and higher total risk, with a volatility of 50%, compared to Exxon Mobil's (XOM) beta of 1.9 and volatility of 35%.

Step-by-step explanation:

In assessing the systematic risk and total risk of stocks, beta and volatility are key indicators. Systematic risk, which is the risk inherent to the entire market or market segment, is often indicated by a stock's beta. General Motors (GM), with a beta of 1.5, has a higher systematic risk than Exxon Mobil (XOM) which has a beta of 1.9. This may seem counterintuitive, but because a higher beta indicates greater sensitivity to market moves, Exxon Mobil, in this case, is expected to experience larger fluctuations with the market than GM.

Total risk, on the other hand, considers both systematic and unsystematic risks and is often associated with a stock's volatility. Volatility is a statistical measure of the dispersion of returns for a given security. Since GM has a predicted volatility of 50% compared to Exxon's 35%, GM bears a higher total risk. This means that GM's stock price is expected to fluctuate more widely around its mean than Exxon's, indicating a higher uncertainty in its returns.