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You are a diversified investor trying to decide whether you should invest in Disney or Amgen....

You are a diversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in?
  • A. Disney, because it has the higher R squared
  • B. Amgen, because it has the lower R squared
  • C. You would be indifferent

Solutions

Expert Solution

R-Sqaure Indiavates HOW RELIABLE THE BETA is. Higher the value of R-Squared, More Reliable the Beta and vice versa.

Therefore, If Betas are equal for 2 securities, the one with HIGHER R-Squared should be chosen i.e. (A) Disney

jeff jeffy answered 2 years ago
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