You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each one's systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money. your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk. If the expected return and standard deviation of returns for Stock A are 10 percent and 20 percent, respectively, and the expected return and standard deviation of returns for Stock B are 15 percent and 35 percent, respectively, which should you choose?

Q&A Education