Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot.

Required:

Which stock is safest for a diversified investor?

Which stock is safest for an undiversified investor who puts all her funds in one of these stocks?

Consider a portfolio with equal investments in each stock. What would this portfolios beta have been?

Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolios return? The standard deviation of the market portfolios return is 20%.

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%.

FIGURE 12.11 Monthly rates of return for (a) Marathon Oil, (b) Intel, and (c) Walmart, plus the market portfolio. FIGURE 12.11 (continued)