An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention: A) both the historical beta and total risk and return. B) the relationship of the historical total risk to return only. C) the relationship of the historical beta and return only.
A
I would go with A
B
C. Total risk is commensurate with Beta so he only needs to give relationship of beta and return.
Hmm, A. Total return sounds much more important in this instance because beta apparently is understating the non-specific risk, however I think he should mention the difference. This would imply disclosing both measures. edit- damnit, got it completely wrong. I suppose the term completely diversified matters here…
I agree, thought it was interesting question though. Schweser is great for Ethics.
I think he has great specific risk and the analyst should consider whether it is suitable to a well diversified portfolio.
A, be as transparent as possible.
If I meet such question in exam , I still choose A for Communication needs to be fair ,accurate and complete . I think schweser questions are too subjective . I don’t trust them .
Paraguay Wrote: ------------------------------------------------------- > C. > > Total risk is commensurate with Beta so he only > needs to give relationship of beta and return. More of a performance appraisal question really, than a ethics one Although C is correct, I don’t think A is incorrect – it lends a clearer picture of the client
Im still inclined towards A…the client should know all the risks of a security, even if they don’t apply to his situation.
surely a low beta but high total risk is a sign of lots of nonsystematic risk. In a well diversified portfolio (in a integrated market) you need to look at Return vs Covariance (beta) not variance. Investor only faces systematic risk beta so C.
Communication needs to be fair ,accurate and complete . He only told beta and return but didn’t told the stock has large specific risk , I think his high return comes from high specific risk but not low beta. It is misleading.
A
I’m going to answer according to CFAI, not cloud my head with third party provider interpretations of the code and standards.