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The average risk aversion in Canadian market is 5. The total standard deviation of the market...

The average risk aversion in Canadian market is 5. The total standard deviation of the market is calculated to be approximately 17%. Based on your analysis, Bombardier stocks with Beta=1.1 have an expected return of 14% and Air Canada's shares with Beta=0.9 have an expected return of 12%. Which security is a good investment and why? Justify your Answer!

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average Risk version of 5 will be reflecting that the investors are highly risk averse because 5 is the maximum risk aversion according to the Harry markowitz model and it will mean that investors are not ready to bear any kind of risk in the market.

beta of 1.1 will be meaning that the stock will be showing higher volatility than the market and beta of .9 will reflect that stock will be showing lower volatility than the overall market.

It is a General tendency of these investors in order to take lower risk because they are highly risk averse so they will not be like the beta of 1.1 as that will be showing higher fluctuations and even though those expected returns are higher.

So, these investors in Canadian market would like to go with this stock of of Air Canada because Air Canada has a lower beta as well as a stable rate of return so they will be trying to go with Air Canada because they would be not liking any risk in their portfolio due to their risk aversion of 5.

jeff jeffy answered 2 years ago
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