If two stocks had the same beta but Stock A had high unsyste

If two stocks had the same beta, but Stock A had high unsystematic risk and Stock B had low unsystematic risk, would investors expect a higher return from holding one of these securities? Explain your answer. Describe systematic and unsystematic risk.

Solution

Investors would only be compensated for systematic risk and not unsystematic risk. Hence stocks with same beta would have same return. As unsystematic risk can be diversified away, one would not get any return from taking unsystematic risk. So Stock A and Stock B would have same return.