You are thinking of adding one of two investments to an already well-

You are thinking of adding one of two investments to an already well- diversified portfolio.

Security A Security B
Expected Return = 14% Expected Return = 16%
Standard Deviation of Standard Deviation of
Returns = 16% Returns = 20%
Beta = 1.2 Beta = 1.2
If you are a risk-averse investor, which one is the better choice?
A) Security A
B) Security B
C) Security B, but only if Security B’s required return is greater than 12%.
D) Either security would be acceptable because they have the same beta.

ANSWER

B