Help with question PLEASE!!

[sweaty]

HI there,

I'm relatively new to this board, but have enjoyed reading your views on trading. If anyone could help me with my essay question it would be great.

It is, "drawing on the CAPM and the option pricing literature, would you expect the volatility of a stock index to be higher or lower than the volatility of a typical stock?"

My first thought was that a fully diversified portfolio such as an index would theoretically have a lower volatility than a single stock. However, i understand that a single stock may have less volatility than a stock index if it's Beta value is closer to zero than the index's Beta value. If the stock's Beta value was greater than the market/index, then it would have more volatility, am i correct in thinking this? Now, this is drawing on the CAPM theory but what can i take from option pricing lit. that would help me answer this? Yes, as volatility increases so does the price of an option for a single stock or a stock index but should i expect to find that option pricing lit. tells me that one's volatility is greater than the other??!! Apologies if i've made this sound a mess but i'd be interested to hear your thoughts.

Regards

Sweaty

 

[QQQShort]

We might start by re-phrasing the question slightly: Would you expect the volatility of a stock index to be higher or lower than the volatility of a typical constituent stock in that index.

I don't know if re-phrasing is an option (no pun intended); it would allow an apple-to-apples comparision -- which should make the analysis easier.

 

[sweaty]

We might start by re-phrasing the question slightly: Would you expect the volatility of a stock index to be higher or lower than the volatility of a typical constituent stock in that index.

I don't know if re-phrasing is an option (no pun intended); it would allow an apple-to-apples comparision -- which should make the analysis easier.

Yes, i agree, that is a better way of phrasing the question. So, do you have any idea as to the answer?! I have had people talk about their own experiences but i am simply looking to see if anyone is aware of any theoretical answer. This is a Masters degree question for an essay, and i just can't seem to find any lit which could help me, and it's not normal to answer this level of questions without a theoretical proof!!! god, that was long-winded, sorry if this only succeeds in bothering you!

cheers
sweaty