FIGURE $12\mathrm{.}11$ Problem $12-4$ Specific versus Market Risk $($LO$1)$

Figure $12\mathrm{.}11$ 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 portfolio$$s 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 portfolio$$s return? The standard deviation of the market portfolio$$s 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 $4\%.$