You are an undiversified investor trying to decide whether you should invest in Disney or Amgen....

You are an undiversified 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. You would be indifferent
B. Disney, because it has the higher R squared
C. Amgen, because it has the lower R squared

Expert Solution

Answer :- option B ( should invest in Disney)

Reasons :- R squared represents proprtion of total variance which is systematic i.e. risk that can not be avoided. Hence Higher R square mend higher proportion of systematic variance and lower R square represents lower proportion of systematic variance in total variance.
Since R square of Amgen is lower , it shows lower systematic variance and higher proportion of unsystematic variance and thus reflects poor diversification at Amgen
hence we should selct Disney

jeff jeffy answered 2 years ago

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You are an undiversified investor trying to decide whether you should invest in Disney or Amgen....

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