4. Specific versus Market Risk. Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. (The plots are similar to those in Figure 12.2.) The beta and standard deviation of each stock are given beside its plot. (L012-1) a. Which stock is safest for a diversified investor? b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks? c. Consider a portfolio with equal investments in each stock. What would this portfolio's beta have been? d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio's return? The standard deviation of the mar- ket portfolio's return is 20%. e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. 20 FIGURE 12.10 Monthly rates of return for the Snake Oil mutual fund and the Standard & Poor's Composite Index 15 10 15 . Snake Oil return (%) -20 - 10 20 -10 -15 -20 Market return (%) (a) 40% FIGURE 12.11 Monthly rates of return for (a) Marathon Oil, (b) Intel, and (c) Walmart, plus the market portfolio for the five years ending December 2017 30% 20% 10% Marathon Oil return (%) OM -10% -5% 5% 10% -20% Beta = 2.39 Std dev = 43.7% -30% Market return (%) (b) 30% 25% 20% 15% 1096 5% Intel return (%) -10% 5%90% -59 10% 210% -15% Beta = 1.07 -20% Std dev = 20.5% Market return (%) FIGURE 12.11 (continued) (c) 30% 25% 20% + 15% + 10% 5% Return on Walmart (%) -10% -5% 5% 10% -5% -5% -10% + -15% Beta = .37 -20% Std dev = 16.4% Market return (%) 4. Specific versus Market Risk. Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. (The plots are similar to those in Figure 12.2.) The beta and standard deviation of each stock are given beside its plot. (L012-1) a. Which stock is safest for a diversified investor? b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks? c. Consider a portfolio with equal investments in each stock. What would this portfolio's beta have been? d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio's return? The standard deviation of the mar- ket portfolio's return is 20%. e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. 20 FIGURE 12.10 Monthly rates of return for the Snake Oil mutual fund and the Standard & Poor's Composite Index 15 10 15 . Snake Oil return (%) -20 - 10 20 -10 -15 -20 Market return (%) (a) 40% FIGURE 12.11 Monthly rates of return for (a) Marathon Oil, (b) Intel, and (c) Walmart, plus the market portfolio for the five years ending December 2017 30% 20% 10% Marathon Oil return (%) OM -10% -5% 5% 10% -20% Beta = 2.39 Std dev = 43.7% -30% Market return (%) (b) 30% 25% 20% 15% 1096 5% Intel return (%) -10% 5%90% -59 10% 210% -15% Beta = 1.07 -20% Std dev = 20.5% Market return (%) FIGURE 12.11 (continued) (c) 30% 25% 20% + 15% + 10% 5% Return on Walmart (%) -10% -5% 5% 10% -5% -5% -10% + -15% Beta = .37 -20% Std dev = 16.4% Market return (%)