1. Security A has an expected return of 7% a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?
2. If investor’s aversion to risk increased, would the risk premium on a high beta stock increase by more or less than that on a low-beta stock? Explain.