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Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an...

Question:

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 12 percent and a standard deviation of 33 percent. The average return and standard deviation of WholeMart are 13 percent and 40 percent, and Fruit Fly is 18 percent and 35 percent.

Total Risk:

The total risk of an asset could be decomposed as the sum of market risk and idiosyncratic risks. Market risks are uncertainties that tend to affect prices of all assets in a similar fashion.

Answer and Explanation:

The total risk of a stock is measured by the standard deviation of its returns. Therefore, a stock with a higher standard deviation has a higher total risk. Based on this criteria, the ranking of the stocks by their total risk level, from highest to lowest, is as follows:

  • WholeMart > Fruit Fly > Night Ryder

Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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