Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5. Security B has and expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is risker? Why?
To determine which security is riskier, we need to compare their risk measures, such as standard deviation and beta coefficient.
1. Standard Deviation:
Security A has a higher standard deviation of returns (35%) compared to Security B (10%). Standard deviation measures the volatility of returns, indicating the range of potential fluctuations. A higher standard deviation implies higher unpredictability and risk.
2. Beta Coefficient:
Security A has a negative beta coefficient of -1.5, while Security B has a positive beta coefficient of 1.0. Beta measures a security's sensitivity to market movements. A higher beta indicates higher sensitivity to market fluctuations.
Considering these criteria, Security A is riskier than Security B. Security A has a higher standard deviation and a negative beta, suggesting that it has higher volatility and is prone to move in the opposite direction of the market. Conversely, Security B has a lower standard deviation and a positive beta, indicating it has lower volatility and closely tracks the market.
It's important to note that risk assessment involves considering multiple factors, and the decision might vary depending on an individual's risk tolerance and investment strategy.