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Asset A B ? D Expected Return 10% 9% 14% 8
Asset A B ? D Expected Return 10% 9% 14% 8.50% Total Return Variance 0.3844 0.5476 0.3600 1.4225 Firm Specific Variance 0.2548 0.4576 0.0000 0.8600 1. A risk-averse investor with a well-diversified portfolio is considering adding asset A or asset B to his/her portfolio. S/he would like to choose the one with lower systematic risk. Which asset would you recommend? Show your calculations.
Expert Solution
Ans:Asset B
Explaination: The Total Return variance shows the total risk of an assset.
Where
Total Risk = Systematic Risk + Unsystematic Risk
The firm specific variance shows the unsystematic risk of an asset.
Therefore, the
Systematic Risk = Total Risk - Unsystematic Risk
Or Systematic Risk = Total Risk Variance - Firm Specific Variance
please see the atteched file
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