"You expect General Motors (GM) to have a beta of 1.5 over the next year, and the beta of Exxon Mobil (XOM) to be 1 over the next year. Also, you expect the volatility (i. e. the standard deviation of returns) of GM to be 40%, and that of XOM to be 60% over the next year. Which stock has more systematic risk? Which stock has more total risk?

A. XOM, GM

B. XOM, XOM

C. GM, XOM

D. GM, GM

Stock of GM has more systematic risk while stock Exxon Mobil has more total risk. So C. GM, XOM is the correct option.

Explanation:

Systematic risk is a risk that is inherent in the market and is undiversifiable. The beta is the measure of systematic risk. The beta of market is always 1 and any stock with a higher beta has a higher systematic risk,

The total risk is the sum of both systematic and unsystematic risk. The unsystematic risk is a risk that is firm specific and is diversifiable through forming a portfolio and diversifying it. The standard deviation is a measure of the total risk and the higher the standard deviation, the higher the total risk.

Stock of GM has a higher beta than that of Exxon thus it has a higher systematic risk. Stock of Exxon has a higher standard deviation thus it has a higher total risk.

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