Q3) Unique vs. Market Risk. The figure below shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given besides its...

Q3)
Unique vs. Market Risk.
The figure below shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given besides its plot.

1. Which stock is riskiest to a diversified investor?


2. Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks?


3. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?


4. Consider a well-diversified portfolio made up of stocks with the same beta as Exxon. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20 percent.

What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8 percent. The risk-free rate of interest is 4 percent.