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 over the next year. Also, you expect the volatility (i.e. the standard deviation of returns) of GM to be 40%, and that of XOM to be 60% over the next year. Which stock has more systematic risk? Which stock has more total risk?

A. XOM, GM

B. XOM, XOM

C. GM, XOM

D. GM, GM

Answer 1

Stock of GM has more systematic risk while stock Exxon Mobil has more total risk. So C. GM, XOM is the correct option.

Step-by-step explanation:

Systematic risk is a risk that is inherent in the market and is undiversifiable. The beta is the measure of systematic risk. The beta of market is always 1 and any stock with a higher beta has a higher systematic risk,

The total risk is the sum of both systematic and unsystematic risk. The unsystematic risk is a risk that is firm specific and is diversifiable through forming a portfolio and diversifying it. The standard deviation is a measure of the total risk and the higher the standard deviation, the higher the total risk.

Stock of GM has a higher beta than that of Exxon thus it has a higher systematic risk. Stock of Exxon has a higher standard deviation thus it has a higher total risk.