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Question 13.5: Consider the following information about two securities. Whi...

Consider the following information about two securities. Which has greater total risk? Which has greater systematic risk? Greater unsystematic risk? Which asset will have a higher risk premium?

Standard Deviation Beta
Security A 40% 50
Security B 20 1.5

 

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From our discussion in this section, Security A has greater total risk, but it has substantially less systematic risk. Because total risk is the sum of systematic and unsystematic risk, Security A must have greater unsystematic risk. Finally, from the systematic risk principle, Security B will have a higher risk premium and a greater expected return, despite the fact that it has less total risk.

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