First, compare the betas for the two stocks. The beta for AAA can be derived with the formula:
Therefore, AAA has larger beta and greater systematic risk than stock BBB which has a beta equal to 1. To assess the unsystematic risk, note that total risk is measured by the standard deviation. Note that the standard deviations for AAA and BBB are identical. Therefore, AAA and BBB have identical total risk. Moreover, note that:
total risk = systematic risk + unsystematic risk.
We have already concluded that both stocks have identical total risk and that AAA has greater systematic risk. Therefore, BBB must have higher unsystematic risk.
