The two charts below contain scatter plots of excess stock returns against excess market returns for Commonwealth Bank of Australia (CBA) and Seek (SEK).
a) Which stock has the highest firm-specific risk? Why? 
b) Which stock has greater systematic risk? Why? 
c) Which stock would be more appropriate for an investor who wants to add this stock to a
well-diversified equity portfolio? Why? 
d) Which stock would be more appropriate for an investor who wants to have this stock as
a single-stock portfolio? Why?

  

Transcribed Image Text:

CBA Return 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% СВА -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% Market Return 8.0% CBA Return 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% СВА -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% Market Return 8.0%

Answer rating: 100% (QA)

Stepbystep explanation a CBA has the highest firmspecific risk This is because CBA has the highest standard deviation of excess returns This means that CBAs excess returns are more spread out and ther... View the full answer